Annual recurring revenue is the yearly value of the subscriptions a business currently holds, normalized to twelve months. It answers one question: if nothing changed from today, what would the next year bring?
ARR = the annualized value of all active, committed subscriptions
MetricHQ describes the same construction: subscription income normalized over a twelve-month period, annualizing active contractually committed subscriptions and excluding one-time fees, professional services, and variable usage charges.
ARR versus revenue
This is the distinction people get wrong most often, and it is not a small one.
Revenue is what accounting recognized in a period. It is backward-looking, governed by recognition rules, and includes everything the business earned: subscriptions, services, one-time fees, overage.
ARR is a forward-looking run rate. It counts only recurring, committed subscription value, and it counts it as if today's book ran for a full year.
The two diverge for ordinary reasons:
- A customer signs a $120,000 annual contract in November. ARR gains $120,000
immediately. Recognized revenue for that calendar year gains about $20,000.
- A business does $2m of implementation work. Revenue includes it. ARR does not.
- A customer churns in month two. ARR drops the day the churn is booked. Revenue
keeps the two months that were already recognized.
So ARR can sit well above recognized revenue in a fast-growing business, and well below it in one carrying heavy services. Neither is an error. They measure different things, and a board deck that compares them without saying which is which invites the wrong conclusion.
ARR versus CARR
CARR, contracted ARR, includes signed accounts that have not yet gone live or started billing.
CARR is always the larger number. It is a fair forecasting metric when onboarding takes months, and a flattering one when it quietly absorbs contracts that will never activate. Pick one, label the series, and do not switch mid-year to make a quarter look better.
What counts and what does not
| Counts toward ARR | Does not |
|---|---|
| Committed recurring subscription value | One-time setup and implementation fees |
| Contracted expansions already active | Professional services and training |
| Multi-year contracts, annualized to one year | Usage overage above the committed floor |
| Committed minimums on usage plans | Signed but not yet live contracts (that is CARR) |
Discounts come out. A $100,000 list contract sold at 20% off is $80,000 of ARR, not $100,000 with a note.
A worked example
A business ends the quarter with:
- 40 customers on $2,000 per month committed plans;
- 6 customers on annual contracts averaging $60,000;
- $180,000 of implementation fees billed during the quarter;
- $22,000 of usage overage above committed minimums.
Monthly plans: 40 x $2,000 x 12 = $960,000
Annual contracts: 6 x $60,000 = $360,000
ARR = $1,320,000
The implementation fees and the overage stay out. They are real money and they are not recurring committed value. Including them would report $1,522,000 and overstate next year by 15%.
Definition pitfalls
- Multiplying one month's total revenue by twelve. That is a run rate on
everything, including services and overage, not ARR.
- Counting signed-not-live contracts without calling the number CARR.
- Booking the full value of a multi-year contract instead of annualizing it.
- Including overage, which is by definition not committed.
- Changing what counts partway through a series without annotating it.
- Reporting ARR growth without separating new, expansion, and churn. A flat ARR
can hide heavy new business offsetting heavy churn, which is a very different business from a stable one.
Questions people actually ask
These come from the queries this page earns, not from a template.
What is ARR in SaaS? The annualized value of active committed subscriptions. See the formula above.
Why is ARR higher than revenue? Usually because a contract signed late in the year adds its full annualized value to ARR while contributing only a few months of recognized revenue. Growth widens the gap.
What is ARR in sales? The same metric. In a sales context it is normally used to size a book of business or to set quota against recurring value rather than total bookings.
What is a good ARR? There is no absolute threshold. ARR is a size measure, not a health measure. Growth rate, net dollar retention, and payback period say whether the business is healthy; ARR only says how big it is.
ARR or CARR? CARR if onboarding regularly takes a quarter or more and you label it. ARR otherwise.
Where ARR fits
ARR is the denominator under most SaaS efficiency measures, and the Measurement pillar of the Tenbound Pipeline Architecture Standard treats it as a reporting input rather than a performance metric.
Read it beside net dollar retention and average revenue per account. ARR tells you the size of the book. Those two tell you whether it is getting healthier.