Last updated October 15, 2026
ARR, or annual recurring revenue, is the yearly value of the subscription revenue a company has under contract today. It counts recurring subscription fees and recurring add-ons, and leaves out one-time charges, uncommitted usage and anything a customer has already cancelled.
In accounting courses, ARR can also mean "accounting rate of return," a capital budgeting ratio. This page is about the subscription metric.
ARR is simple to define and easy to get quietly wrong. The formula takes one line. The hard part is deciding what happens to the number when a customer upgrades on the 16th, gets a three-month discount, or moves to a different plan, and then making sure everyone who touches billing records those changes the same way. The rest of this page works through those cases with numbers.
How do you calculate ARR?
ARR is the sum of every active subscription's recurring value, normalized to twelve months. For a business on monthly plans, that is monthly recurring revenue (MRR) times 12. For annual and multi-year contracts, it is each contract's yearly value.
A worked example. A SaaS company has 80 customers on a $200 monthly plan and 15 customers on a $3,000 annual plan. Each customer also paid a $500 setup fee.
- Monthly customers: 80 × $200 = $16,000 MRR, or $192,000 a year
- Annual customers: 15 × $3,000 = $45,000 a year
- ARR: $192,000 + $45,000 = $237,000
The $47,500 in setup fees is real cash and real revenue, but it doesn't recur, so it stays out of ARR. A three-year contract worth $90,000 counts as $30,000 of ARR, not $90,000.
What counts in ARR, and what doesn't?
ARR includes recurring charges a customer is committed to and excludes everything else. Most SaaS teams draw the line like this:
None of these rows is a law. What matters is that the rule is written down and applied the same way every month, because a change in definition will look like a change in the business.
Is ARR the same as revenue?
No. Revenue is what a company has earned under accounting rules, which for most US companies means recognizing subscription revenue as the service is delivered (ASC 606). ARR is a run rate: what the current contracts are worth over a year if nothing changes.
The two diverge constantly. A customer who signs a $12,000 annual contract on December 1 adds $12,000 to ARR that day, but only $1,000 to December's revenue.
ARR is also not defined by any accounting standard, so each company chooses its own definition. When a public company reports a metric like ARR, the SEC's 2020 guidance on key performance indicators expects it to state the definition, explain how it is calculated, and disclose when the calculation changes. A private company owes no one that discipline, and that is exactly why an investor will ask for it.
What's the difference between ARR and MRR?
MRR is the same measurement taken monthly: the recurring revenue under contract this month. ARR is that figure on a yearly scale, which suits companies with annual contracts and conversations with investors. MRR moves faster and is the better number for tracking month-to-month change. The two should always reconcile: MRR × 12 should equal ARR unless something is wrong. We go further in MRR vs ARR.
How do upgrades and downgrades change ARR?
An upgrade raises ARR by the change in the subscription's yearly value, starting the day it takes effect. The invoice that month is a different number, and this is where reports most often disagree.
Take one customer on the $200 monthly plan who upgrades to a $300 plan on the 16th of a 30-day month:
- The change in ARR: $100 a month more, so ARR rises by $1,200.
- The invoice: the customer is billed a prorated $50 for the 15 remaining days at the higher price.
Both numbers are correct. They answer different questions. The $50 is what the company billed; the $1,200 is what the subscription is now worth over a year. An ARR or MRR report built from invoices will show the $50 and understate expansion, and a finance lead preparing investor numbers ends up correcting it account by account. Build ARR from subscription records, not from invoice totals.
A downgrade works the same way in reverse. A move from $300 to $200 a month lowers ARR by $1,200 and counts as contraction, not churn, because the customer is still paying.
Why does a plan change sometimes show up as churn?
A plan change shows up as churn when it is entered as a cancellation plus a brand-new subscription instead of an edit to the existing one. The customer never left, but the report sees one customer cancel and another sign up.
Using the same customer, moving from $200 to $300 a month:
- Edited in place: $1,200 of expansion ARR. Correct.
- Cancelled and recreated: $2,400 of churned ARR and $3,600 of new ARR.
Net ARR comes out the same either way, which is why nobody notices. But churn is now overstated by $2,400 and new business is overstated by $3,600. Retention looks worse and sales looks better, both for the wrong reason.
We've seen this on a support call with a website hosting company whose team moved customers between bundles by cancelling and recreating them. Their churn report was full of customers who had actually upgraded. The fix was a change in procedure: train the team to edit the existing subscription's products and discounts, so upgrades and downgrades register as expansion and contraction. The same pattern turns up when duplicate subscription records sync into a CRM and double-count ARR in rollups.
What is a good ARR growth rate?
It depends heavily on stage and funding. SaaS Capital's 2026 survey of more than 1,000 private SaaS companies put median ARR growth for bootstrapped companies between $3 million and $20 million of ARR at 15%, down from 20% the year before. The top 10% grew 42% or more. Venture-backed companies typically grow faster and spend more to do it.
Before comparing your number to any benchmark, check that it is measured the same way. A benchmark that counts usage or excludes downgrades isn't measuring the same thing your ARR is. For more on reading and improving the trend, see ARR growth; for how much of last year's ARR you kept, see net dollar retention.
Keeping ARR accurate
ARR holds up when it can be rebuilt from individual subscriptions, line by line, and the total matches what you report. That is the test a buyer or investor runs during diligence, and it fails for the reasons above: plan changes recorded as cancellations, one-time fees counted as recurring, discounts left at full price, duplicates in a downstream system.
In ChargeOver, a plan change made by editing the subscription, rather than cancelling it, shows up in the MRR reports as expansion or contraction, and the MRR summary report exports to Excel for board or investor packs. Customers can find the MRR reports in Report Center. If you're working out whether your current setup will survive that kind of scrutiny, see how ChargeOver handles it.
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FAQ
What does ARR stand for?
ARR stands for annual recurring revenue: the yearly value of the recurring subscription revenue a company has under contract today.
How do you calculate ARR from MRR?
Multiply MRR by 12. A company with $16,000 of MRR has $192,000 of ARR, provided MRR includes only recurring, committed charges.
Do one-time fees count toward ARR?
No. Setup, implementation and training fees are revenue but not recurring revenue, so they stay out of ARR even when they're large.
Does a downgrade count as churn?
No. A customer who moves to a cheaper plan is still a customer. The lost amount is contraction, and it reduces ARR without counting as a churned customer.
