TL;DR
ARR is the annualized value of all active subscription contracts at a point in time. It equals MRR multiplied by 12. One-time fees, professional services, and uncommitted usage are excluded. Net New ARR equals New plus Expansion minus Contraction minus Churn.
Definition
ARR is the most quoted metric in SaaS, and it is also the most frequently misreported one. A founder who quotes a 5 million dollar ARR figure may be including signed-not-live contracts, professional services revenue, and one-time setup fees. The board reads 5 million dollars and prices the company against that number. The next quarter, when one of those contracts is cancelled before going live and the setup fees do not renew, the ARR number drops and the board loses confidence.
ARR is a point-in-time snapshot, not a trailing or forward-looking figure. If a company has 7.2 million dollars in ARR on 31 March, that means the sum of all live, recurring contracts on that date produces 7.2 million dollars on an annualized basis. ARR is not what the company invoiced last year. It is not what the company will invoice next year. It is what the current contract base would generate over twelve months if nothing changed.
The fix is mechanical: define ARR cleanly, calculate it the same way every month, and refuse to mix in non-recurring revenue. What counts toward ARR: subscription fees for the core product, recurring platform fees, contractually committed usage tiers, recurring per-seat fees, and recurring add-ons that auto-renew. What does not count: one-time setup fees, implementation charges, professional services, training, hardware, and signed contracts not yet live.
How to calculate ARR
Take every live subscription contract on a single date, calculate the annualized value of each, and add them up. Three contract types produce three calculation rules.
- Monthly subscribers: multiply the monthly subscription fee by 12. A customer paying 1,200 dollars per month contributes 14,400 dollars to ARR.
- Annual subscribers: take the annual contract value as it stands. A customer paying 60,000 dollars per year contributes 60,000 dollars.
- Multi-year contracts: divide the total contract value by the contract length in years. A 300,000 dollar three-year contract contributes 100,000 dollars to ARR, not 300,000 dollars.
ARR also equals MRR multiplied by 12. The relationship between ACV and ARR matters for board reporting: ACV multiplied by customer count equals ARR. When the two numbers do not reconcile, the cause is almost always a mix of contract lengths or definitional drift between systems.
ARR components
The ARR movement during a period decomposes into four components. Each has a separate owner inside the revenue team, and reporting them separately is what makes coaching and forecasting possible.
New ARR
ARR added from new logos closed in the period. Owner: new-business AE team.
Expansion ARR
ARR added from existing customers through upsells, cross-sells, or seat expansions. Owner: account management or CS.
Contraction ARR
ARR lost from existing customers who downgraded but did not churn — seat reductions, tier downgrades, or removed add-ons.
Churn ARR
ARR lost from customers who fully cancelled. Net New ARR equals New plus Expansion minus Contraction minus Churn.
ARR vs MRR
ARR and MRR measure the same recurring revenue on different time horizons. MRR is the operating metric for early-stage SaaS where most customers pay monthly. A team with 850 monthly subscribers each paying an average of 240 dollars per month has 204,000 dollars in MRR and 2.45 million dollars in ARR. As the team moves upmarket and contracts shift to annual, MRR becomes a less useful operating signal and ARR takes over as the headline board metric.
GAAP revenue is different from both. It includes services, one-time setup, training, and any other revenue recognized during the period under ASC 606. A board that reads ARR and revenue as the same number will be confused when the audited financials do not match the ARR walk. Show both in the board pack with the reconciliation between them.
See it in the product
ARR tracking — inside a real Gangly workflow.
Gangly surfaces ARR movement signals in your pipeline so reps see expansion and churn risk before the renewal arrives.
Frequently asked questions
What does ARR stand for?
ARR stands for Annual Recurring Revenue. It is the predictable subscription revenue a SaaS business generates in one year, normalized to a 12-month basis. ARR includes only recurring contractual revenue and excludes one-time fees such as setup, training, and professional services.
How is ARR calculated?
ARR is the sum of the annualized value of every active subscription contract at a point in time. For a monthly subscriber paying 500 dollars a month, the contribution to ARR is 6,000 dollars. For a 300,000 dollar three-year contract, the annualized value is 100,000 dollars. ARR also equals MRR multiplied by 12.
What is the difference between ARR and revenue?
ARR is a forward-looking snapshot of recurring contract value. GAAP revenue is the amount earned and recognized in an accounting period, including services and one-time fees. A company with 12 million dollars in ARR may report a different revenue number because of deferred recognition, one-time services, or deals signed mid-quarter.
Do one-time fees count toward ARR?
No. Setup fees, implementation charges, professional services, training, and hardware sales are excluded from ARR. ARR captures only the recurring subscription revenue that will renew on contract terms. Mixing one-time fees into ARR is the most common reporting error in early-stage SaaS.
What is Net New ARR?
Net New ARR is the change in ARR during a period. The formula is New ARR plus Expansion ARR minus Contraction ARR minus Churn ARR. A 4 million dollar Net New ARR quarter means total ARR grew by 4 million dollars after accounting for downgrades and cancellations.