ARR: definition, calculation, and relationship to MRR
Updated on February 22, 2026
Quick definition
ARR (Annual Recurring Revenue) is the annual recurring revenue that represents the total value of predictable subscription revenue over a year, normalized to a 12-month basis. ARR is the reference metric for B2B SaaS with annual contracts and is central to the valuations of technology companies.
How it works
Formula
ARR = MRR × 12 (or sum of the annual value of all active subscription contracts)
Example: SaaS with €50,000 MRR has €600,000 ARR
ARR should only include strictly recurring revenue: one-shot revenue (implementation, training, ad-hoc consulting) is excluded because it does not repeat automatically in subsequent years.
Like MRR, ARR breaks down into four components:
- New ARR — new contracts signed during the period
- Expansion ARR — upsells and upgrades from existing customers
- Churn ARR — contract cancellations
- Contraction ARR — downgrades from existing customers
The year-over-year ARR growth rate is one of the most closely watched metrics by venture-capital investors. The T2D3 rule (triple ARR for two years, then double for three years) describes an exemplary growth trajectory for hyper-growth SaaS.
At €10M ARR, a SaaS typically begins to be valued at significant multiples by investment funds.
Why it matters
ARR is the reference metric for B2B SaaS because enterprise contracts are usually signed on an annual basis. It provides a more stable, smoothed view than MRR — particularly useful when revenue fluctuates month over month due to the seasonality of contract signings.
For founders and finance leaders, ARR is the foundation of all growth projections and decisions on hiring, product investment, and geographic expansion.
The symbolic milestones are recognized across the SaaS ecosystem:
- €1M ARR — first significant milestone, product-market fit validation
- €5M ARR — onset of commercial scalability
- €10M ARR — threshold for institutional valuations
- €100M ARR — established scale-up
How to improve or use it
- 1Prioritize annual contracts with prepayment: they improve cash flow and reduce monthly churn risk.
- 2Develop a structured upsell motion so existing customers move up to higher plans (Expansion ARR).
- 3Reduce Churn ARR by investing in Customer Success: proactive monitoring of at-risk accounts protects your existing ARR base.
- 4Sign multi-year contracts with key accounts to lock ARR over 2–3 years and reduce projection uncertainty.
- 5Track your NRR (Net Revenue Retention): an NRR > 100% means your ARR grows even without new customers — the hallmark of a very healthy model.
With Sublim
Sublim helps you understand which features and usage patterns are most correlated with retention and account expansion. By analyzing the behaviors of high-ARR users, you create Customer Success playbooks that reproduce these behaviors among new customers — reducing churn and increasing the probability of Expansion ARR. Data GDPR-compliant.
Frequently asked questions
ARR vs. MRR: which one should you communicate to investors?
The convention depends on the billing model. SaaS companies with annual contracts and a B2B base typically communicate in ARR, since it is the natural unit of customer commitment. SaaS with monthly subscriptions or significant B2C exposure use MRR. The key is consistency: choose a metric and track it rigorously over time.
Does ARR include professional services revenue?
No, ARR should only include strictly recurring revenue tied to subscriptions. Professional services revenue (implementation, training, consulting) is one-off and non-recurring, and therefore excluded from ARR. Including it would artificially inflate ARR and give a misleading picture of the predictability of future revenue.
What is Net Revenue Retention (NRR) and how does it relate to ARR?
NRR (Net Revenue Retention) measures the percentage of initial ARR retained after 12 months, including expansions and churns: NRR = (Beginning-of-period ARR + Expansion ARR – Churn ARR – Contraction ARR) / Beginning-of-period ARR × 100. An NRR above 100% means existing customers generate more ARR than they did 12 months ago, despite departures — a sign of a very healthy model.
Related terms
MRR (Monthly Recurring Revenue) is the monthly recurring revenue repre…
Churn rate (or attrition rate) is the percentage of customers or subsc…
LTV (Lifetime Value), or customer lifetime value, is the total revenue…
ARPU (Average Revenue Per User) is the average revenue per user that m…