# Annual Recurring Revenue

_Also known as: ARR_

**Category:** Metrics
**URL:** https://skiporship.com/glossary/annual-recurring-revenue
**Last updated:** 2026-08-08

## Definition

Annual recurring revenue (ARR) is the value of recurring subscription revenue normalised to a twelve-month period — typically monthly recurring revenue multiplied by twelve.

## What it means in practice

ARR expresses the recurring revenue run rate over a year. It is the standard reporting metric for businesses selling annual contracts, where monthly figures would misrepresent how the business is actually bought and sold.

ARR is a run rate, not an accounting figure. It states what the next twelve months would produce if nothing changed — no churn, no expansion, no new sales. Because it is forward-looking and not governed by accounting standards, it is comparatively easy to present generously, which is why the definition behind any ARR figure deserves inspection.

The common inflations are consistent: annualising a single strong month, including non-recurring services revenue, or counting signed contracts before payment. Each turns a marketing number into something that will not survive diligence.

## Formula

```
ARR = MRR × 12
```

A run rate, not revenue earned. It describes the next twelve months assuming nothing changes — which never happens.

## Worked example

A company reporting £2.4m ARR, examined more closely.

- Current MRR: £180,000 → genuine recurring ARR of £2.16m.
- Plus £240,000 of one-off implementation fees counted as recurring.
- Reported ARR: £2.4m; defensible ARR: £2.16m.

**Takeaway:** The £240,000 will not repeat next year, so 10% of the headline evaporates under scrutiny — exactly the kind of adjustment that surfaces in diligence.

## Common mistakes

- Annualising an unusually strong month rather than a stable run rate.
- Including implementation fees or professional services that do not recur.
- Counting signed but unpaid contracts as live ARR.
- Presenting ARR without churn context, which says nothing about whether it will persist.

## Related tool

[SaaS pricing calculator](https://skiporship.com/calculators/saas-pricing)

## Related terms

- [Monthly Recurring Revenue](https://skiporship.com/glossary/monthly-recurring-revenue) — Monthly recurring revenue (MRR) is the predictable subscription revenue a business earns each month, normalised so annual and multi-year contracts are expressed as a monthly figure.
- [Churn Rate](https://skiporship.com/glossary/churn-rate) — Churn rate is the percentage of customers (or revenue) lost over a given period. It determines how much new business you must win simply to stand still.
- [Net Revenue Retention](https://skiporship.com/glossary/net-revenue-retention) — Net revenue retention (NRR) measures how revenue from an existing cohort of customers changes over a year, including upgrades, downgrades and cancellations but excluding new customers. Above 100% means the cohort grows on its own.
- [Unit Economics](https://skiporship.com/glossary/unit-economics) — Unit economics are the direct revenues and costs associated with a single unit of your business — usually one customer — showing whether each one is profitable before overheads.

## FAQ

**Is ARR the same as revenue?**

No. ARR is a forward-looking run rate describing what the next twelve months would produce if nothing changed. Actual revenue is what you genuinely earned and is governed by accounting standards.

**Should I report ARR or MRR?**

Report whichever matches how you sell. Businesses on annual contracts typically use ARR; those with mostly monthly subscriptions use MRR, where month-to-month movement is more informative.

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