Definition
Annual recurring revenue (ARR) is the yearly value of subscription or contracted revenue that is expected to repeat, measured at a point in time. For most subscription businesses it equals monthly recurring revenue multiplied by 12. It leaves out one-off set-up fees, consulting work and unusual usage spikes, and counts each customer at what they actually pay after any discount.
Recurring revenue comes back without being won again each time, through subscriptions, retainers or service contracts. Contracted revenue is the part committed for a fixed term.
Monthly recurring revenue (MRR)
Monthly recurring revenue is the subscription revenue a business expects to bill in a normal month. Its monthly movements show where growth comes from and where it leaks away.
Worked example
Ledgerline is a fictional US software business with 400 customers on monthly plans, paying an average of $250 a month each. Last year it also earned $150,000 from one-off implementation projects.
ARR = 400 customers times $250 times 12 = $1,200,000.
The implementation income is real revenue, but it does not repeat, so it stays out of ARR. Forty of the customers are on a half-price first-year discount that ends next quarter. If the seller counts them at full price, ARR looks higher than anything the business has yet billed.
Why buyers care
Software businesses are often priced as a multiple of ARR, so every overstated dollar costs you several. Rebuild ARR yourself from the billing system, customer by customer, rather than accepting a dashboard figure. Check that annual plans are not counted twice, that failed or paused payments are excluded and that every customer counted is still active.
ARR on its own says nothing about how long customers stay, so read it alongside churn and net revenue retention. Loupe's valuation tool values SaaS businesses that report ARR on an ARR multiple and cross-checks the result against an SDE multiple.
Churn is the rate at which a business loses customers or recurring revenue over a period. Customer churn and revenue churn can tell very different stories.
Net revenue retention compares the recurring revenue from existing customers now with the same customers a year earlier, including upgrades, downgrades and cancellations.