Grid

Annual Recurring Revenue (ARR) is the total annualized value of a subscription. It measures the amount of predictable and recurring revenue a company can expect over the course of a year. ARR is one of the most popular revenue metrics for SaaS businesses, as it represents the likely revenue current customers will produce over the next year.

In this guide we'll explain what ARR is, how it’s calculated, how it’s used, provide real life example, and where teams commonly make mistakes.

What's ARR?

Annual Recurring Revenue (ARR) is the total amount of predictable, recurring revenue a business expects to receive in a year from active subscription contracts.

ARR focuses only on revenue that:

Is recurring by nature
Is contractually committed
Can be normalized to a one year period

Annual Recurring Revenue (ARR) Formula

Total subscription revenue + Upgrades − Cancellations

= ARR

Basic ARR Examples

Annual subscription: A customer paying $1,200 per year contributes $1,200 in ARR.
Monthly subscription: A customer paying $100 per month contributes $1,200 in ARR.
Multi-year contract: A $150,000 contract over three years contributes $50,000 in ARR.

ARR vs Anualized Revenue, Recurring Revenue, & Total Revenue

Let's compare these often confused metrics to make sure the concept is clear before moving onto examples.

Metric	What It Measures	Includes	Excludes	Best Used For
Annual Recurring Revenue (ARR)	The predictable revenue a subscription business expects to earn in a year from active recurring contracts.	Ongoing subscription fees that recur on a regular basis and are contractually committed.	One-time fees, usage spikes, services, implementation fees, and non-recurring revenue.	Measuring SaaS growth, retention, and long-term revenue health.
Annualized Revenue	An estimate of full-year revenue based on a shorter actual period such as a month or quarter.	All revenue earned in the measured period, projected to a 12-month timeframe.	Adjustments for seasonality, churn, or expected changes unless modeled separately.	Estimating annual performance when limited historical data is available.
Recurring Revenue	Revenue that is expected to repeat over time based on ongoing customer payments.	Subscription fees, maintenance contracts, retainers, and other repeating payments.	One-time purchases and non-contractual, unpredictable revenue.	Assessing revenue stability and predictability across subscription or service models.
Total Revenue	The total income generated from all goods and services over a given period.	Recurring revenue, one-time fees, usage charges, services, and product sales.	No revenue categories are excluded by definition.	Understanding overall business size and top-line financial performance.

How do I calculate ARR?

Let’s look at a few examples on how to calculate ARR in different cases.

1. ARR from MRR

The most basic formula multiplies your MRR x 12 to get recurring revenue.

ARR from MRR Formula

MRR × 12

= ARR

This method works well when subscriptions are monthly or annual, pricing is stable, and usage-based or variable fees are excluded.

ARR from MRR Example

Monthly Recurring Revenue (MRR): $50,000

ARR = $50,000 × 12 = $600,000

2. Ignoring one-time fees

Remember that ARR ignores one-time revenue, in the following example Starter Implementation isn't added to the formula since we're only charging for it once.

Product	Quantity	Price	Type	Total Amount
Annual Platform Fee	1	$4,500	Subscription	$4,500
User Seats (Annually)	5	$150	Subscription	$750
Starter Implementation	1	$1,000	One-Time	$1,000

ARR Ignoring One-time Fees

Annual Platform Fee ($4,500) + User Seats ($750)

= ARR

Only recurring subscription products are included in ARR. One-time fees are excluded.

Ignoring One-time Fees Example

Annual Platform Fee (subscription): $4,500
User Seats, billed annually (subscription): $750
Starter Implementation (one-time): $1,000 (excluded from ARR)

ARR = $4,500 + $750 = $5,250

The one-time implementation fee is not included because ARR represents predictable, recurring revenue only.

3.The comprehensive formula

This approach is common for finance reporting and board level analysis. It measures ARR and how it's changed with expansion, contraction, and churn.

ARR Change Formula

(New ARR + Expansion ARR) − (Contraction ARR + Churned ARR)

= ARR

How Each Component Works

New ARR: Recurring revenue from new customers acquired during the period.
Expansion ARR: Additional recurring revenue from existing customers, such as upsells, add-ons, or seat growth.
Contraction ARR: Lost recurring revenue from downgrades or reduced usage.
Churned ARR: Recurring revenue lost when customers cancel entirely.

This structure makes ARR movement transparent by separating growth drivers from revenue losses, helping teams understand whether changes in ARR are driven by acquisition, expansion, or retention dynamics.

If there is expansion or contraction, ARR reflects the revenue that would be received if the most recent version of the contract continues for another year. In this example you can see an ARR downsell in March and an ARR upsell in July

	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec
Starting ARR	$9,600	$9,600	$9,600	$7,800	$7,800	$7,800	$7,800	$12,000	$12,000	$12,000	$12,000	$12,000
ARR Change	--	--	$1,800	--	--	--	$4,200	--	--	--	--	--
Ending ARR	$9,600	$9,600	$9,600	$9,600	$9,600	$9,600	$12,000	$12,000	$12,000	$12,000	$12,000	$12,000
Monthly Revenue	$800	$800	$650	$650	$650	$650	$1,000	$1,000	$1,000	$1,000	$1,000	$1,000

Note that wether the MRR goes up or down, ARR is the forward-looking expectation of revenue for the next 12 months, and always reflects the most recent contract. In this case we'll use our update formula to calculate the new ARR which will remain static until another upsell or downsell comes around.

ARR Update Formula

Starting ARR + ARR Change

= Ending ARR

ARR represents the forward-looking recurring revenue expectation for the next 12 months based on the most recent active contract.

ARR Update Example (Downsell and Upsell)

Starting ARR (January–February): $9,600
March downsell (ARR change): −$1,800
Ending ARR after downsell: $7,800

Ending ARR (March) = $9,600 − $1,800 = $7,800
Monthly revenue expectation = $7,800 ÷ 12 = $650

Starting ARR (June): $7,800
July upsell (ARR change): +$4,200
Ending ARR after upsell: $12,000

Ending ARR (July) = $7,800 + $4,200 = $12,000
Monthly revenue expectation = $12,000 ÷ 12 = $1,000

In both cases, ARR updates immediately after a contract change and reflects the expected recurring revenue over the next 12 months, not historical cash collected. Monthly revenue is simply the ARR normalized to a monthly view.

How much ARR should I have?

ARR benchmarks vary a lot by industry and company age, but there are some general targets for ARR and growth rates to consider.

1. Based on Growth Stage

This is a good benchmark to start with since you can quickly get an idea in which part of the cycle your SaaS business currently sits at.

Company Stage	ARR Range	Description
Early Stage	Under $1M ARR	Typically pre-scale companies focused on product-market fit, early customer acquisition, and foundational revenue processes.
Growth Stage	$1M to $10M ARR	Companies scaling go-to-market efforts, improving retention, and formalizing finance and revenue operations.
Scale Stage	Over $10M ARR	Mature SaaS businesses focused on efficiency, forecasting accuracy, expansion, and operational scalability.

2. Based on Founding Rounds

The table below details some benchmarks for ARR, YoY (Year over Year) Growth, and CMGR (Compound Monthly Growth Rate). All of these metrics combine to indicate what a healthy growth in ARR looks like for most SaaS businesses.

Funding Round	ARR	YoY Growth	CMGR
Series A	$1M+	3×	10%
Series B	$5M+	2.5×	8%
Series C	$10M+	2×	6%

‍

Grid helps founders, investors, and operators like you get the most out of their data. Use Grid to discover what segments, products, and industries drive your sales growth and see where you're winning customers.