Annual recurring revenue (ARR) is the value of your recurring subscription revenue over a year, based on the customers and contracts active today. For most businesses it's simply MRR multiplied by 12. It excludes one-off fees, professional services, unpredictable usage and taxes. ARR is a forward-looking snapshot, not the revenue in your accounts, and it's not the same as a run rate built from total sales.
Key takeaways
- ARR = MRR × 12, or the sum of annualized recurring contract values.
- ARR is a snapshot of recurring revenue today, not last year's revenue and not a forecast.
- Run rate (this month's total revenue × 12) is not ARR if it includes usage spikes, hardware or one-off sales.
- Many 2026 '$100M ARR' announcements are self-reported run rates. Read them carefully.
- Median growth for private B2B SaaS over $1M ARR was 24% in SaaS Capital's 2025 data.
In Chapter 3 of The Subscription Playbook I shared some simple math from Jason Lemkin, co-founder of EchoSign.
Say you charge $10 a month and you want to reach the $100 million or so in annual revenue that a public listing usually needs. You'd need about a million subscribers. That's $10 million a month, or $120 million a year.
Lemkin's point was about freemium. If only 2 percent of free users convert, you'd need 50 million of them.
But there's a second lesson hiding in that sum. It's an annual recurring revenue calculation. A million subscribers at $10 a month is $120 million of ARR. And that one number shapes everything: how big your market must be, what price you charge, and what the business is worth.
What is annual recurring revenue?
Annual recurring revenue (ARR) is the yearly value of the recurring subscription revenue you have right now.
It's a snapshot. It answers the question: "If every current customer kept paying exactly what they pay today, how much would we collect over the next 12 months?"
It isn't last year's revenue. It isn't a forecast that assumes growth. And it definitely isn't this month's total sales multiplied by 12.
ARR = MRR × 12
For businesses with annual or multi-year contracts, the equivalent is:
ARR = Sum of the annualized recurring value of every active contract
A three-year contract worth $90,000 contributes $30,000 to ARR, not $90,000.
A worked example: an accounting firm on fixed fees (illustrative)
A small firm moving clients to monthly packages
- 60 clients on a $450-a-month compliance package: $27,000 MRR
- 25 clients on a $900-a-month advisory package: $22,500 MRR
- 10 clients on an annual $3,000 tax-only plan: $30,000 ÷ 12 = $2,500 MRR
- One-off business structuring jobs this year: $40,000 (not ARR)
MRR = $27,000 + $22,500 + $2,500 = $52,000
ARR = $52,000 × 12 = $624,000
The firm's total revenue this year might be well over $660,000 once the structuring work is added. But $624,000 is the part that's recurring, and it's the part a buyer will value most.
That's the shift the case study on accounting firms' fixed monthly fees is all about.
Convert your own plans with the MRR calculator.
MRR CalculatorCalculate MRR, ARR and MRR movements.Open the free tool →ARR vs MRR vs revenue vs run rate
These four get mixed up constantly. Here's the difference.
| Metric | What it measures | Includes one-off sales? | Includes usage spikes? |
|---|---|---|---|
| MRR | Recurring subscription revenue per month, today | No | No |
| ARR | MRR × 12: recurring revenue per year, today | No | No (committed minimums only) |
| Revenue | What your accounts recognize over a period | Yes | Yes |
| Run rate | This period's total revenue, annualized | Usually yes | Yes |
A run rate can be useful. It just isn't ARR.
Turn your plans into MRR and ARR
The free MRR Calculator converts every billing period and gives you MRR, ARR and net new MRR.
Why 2026's ARR headlines need a pinch of salt
In 2026, "we just crossed $100 million ARR" became the most popular announcement in tech. Our research into the 44 companies that crossed about $100M ARR in 2026 found most milestones were self-reported, often in a LinkedIn post.
Some were candid about it. Arena, the AI leaderboard, said its revenue is consumption-based and "not recurring." For others, hardware sales were part of the number.
That doesn't make the companies bad businesses. It means "ARR" in a headline often means run rate. When you compare yourself, compare against audited or carefully defined figures. Brisbane's TechnologyOne, for example, reported total ARR of A$554.6 million for FY25, up 18 percent, and ARR is 91 percent of its total revenue. Employment Hero announced it passed A$300 million in ARR in October 2025.
What's a good ARR growth rate?
| Source and year | Segment | Growth |
|---|---|---|
| SaaS Capital, 2025 | Private B2B SaaS over $1M ARR, median | 24% |
| SaaS Capital, 2025 | Same group, NRR above 130% | 50% |
| SaaS Capital, 2025 | Same group, NRR below 90% | 15% |
| KeyBanc and Sapphire Ventures, released Nov 2025 | Private SaaS, year-on-year ARR growth | 15% in 2024, expected 20% in 2025 |
The link between retention and growth is the big takeaway. Companies that keep and grow their existing customers grow far faster. See net revenue retention.
Growth isn't everything, either. The Rule of 40 calculator scores growth and profit together.
Common ARR mistakes
- Annualizing a spike. One great month times 12 is a wish, not ARR.
- Counting total contract value. Multi-year deals are annualized.
- Including services. Implementation and consulting fees aren't recurring unless they're built into the subscription.
- Including GST. Australian businesses should report ARR excluding GST.
- Counting signed contracts that haven't started. Report those as contracted ARR, separately.
ARR isn't the revenue in your accounts
This trips up a lot of owners when they first sit down with their accountant.
ARR is a management metric. Your financial statements follow accounting standards. In Australia that's AASB 15, which recognizes subscription revenue over the period you deliver the service. A client who pays $3,000 upfront for a year adds $3,000 to your bank account today, $250 a month to recognized revenue, and $3,000 to ARR. The unearned part sits on your balance sheet until you deliver it.
None of these numbers is wrong. They answer different questions: how much cash do I have, what have I earned, and what recurring revenue is locked in? For the detail, read revenue recognition for subscriptions.
Does ARR matter for a small business?
Yes, especially when you come to sell.
A cafe with $5,000 of coffee-club MRR has $60,000 of ARR on top of its normal trade. A vet clinic with 500 wellness-plan members at $55 a month has $330,000 of ARR (illustrative figures). Buyers and lenders treat that recurring layer very differently from walk-in sales, because it's predictable.
That's the heart of recurring revenue multiples, and why I argue in Chapter 1 that subscription is the ultimate business.
Free Subscription Profit Review
Australian business owners can book a free 30-minute review with a BPAG Accountants adviser. An honest conversation about:
- whether a subscription model could work for your business
- how recurring revenue could cover your fixed costs each month
- how it could lift what your business is worth
No cost, no obligation. General information only until we understand your situation.
What to do next
- Calculate MRR first, then multiply by 12. Exclude GST, one-off fees and volatile usage.
- Write down your definition. Use the same rule every month.
- Track ARR growth alongside ARPU and retention, not on its own.
- If you're thinking about a sale or raise, test your numbers in the valuation estimator.
Frequently asked questions
Should I use ARR or MRR?
Use whichever matches how customers pay and how you plan. Monthly-billed consumer and small-business subscriptions usually run on MRR, because changes show up month to month. Businesses selling annual or multi-year contracts usually lead with ARR. They're the same number at different scales, so many companies track MRR internally and report ARR to investors or buyers.
Does ARR include one-time fees?
No. Setup, implementation, training, hardware and other one-off fees are excluded because they won't recur. If you bundle onboarding into a monthly fee, like TechnologyOne's SaaS+ offer, that fee becomes part of the subscription and does count. The test is simple: will the customer pay this again next year if nothing changes?
Is ARR the same as annual contract value (ACV)?
No. ARR is the total across all customers. ACV is the average annual value of one customer's contract. In Chapter 7 of the book I list ACV as a land-and-expand metric because it shows whether each customer is worth more over time. Divide ARR by the number of customers and you get a rough average ACV.
Does ARR include usage-based revenue?
It's debated. Committed minimums and stable, contracted usage are usually included. Volatile pay-as-you-go usage is better reported separately, or as a run rate clearly labeled as such. If you include usage, say how: a trailing three-month average annualized is common. Investors will ask, so decide your rule before they do.
What is contracted ARR?
Contracted ARR (sometimes CARR) includes contracts that are signed but haven't started billing yet, on top of live ARR. It's useful in businesses with long implementations, where a customer signs months before going live. Report it separately from live ARR so nobody mistakes signed-but-unbilled revenue for revenue you're collecting today.
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Robert Coorey, MBA
Robert is the author of The Subscription Playbook and Feed a Starving Crowd and a Director at BPAG Accountants in Sydney. More about Robert.
Sources
- SaaS Capital, 2025 B2B SaaS Retention Benchmarks, growth figures (Sept 2025)
- KeyBanc Capital Markets and Sapphire Ventures, Private SaaS Company Survey press release (13 Nov 2025)
- TechCrunch, Arena is now a $100M business (29 Jun 2026)
- TechnologyOne, FY25 full-year results presentation (Nov 2025)
- Employment Hero, Employment Hero surpasses A$300M ARR (8 Oct 2025)
- The Subscription Playbook, Chapters 3 and 7 (Robert Coorey, 2022)
Facts and prices checked 27 October 2026. Spotted something out of date? Tell us.