An annual view of a snapshot
ARR helps put the size of a subscription business into an annual plan or management report. Read it alongside its definition. Here, ARR means annualised MRR, rather than the sum of accounting revenue recognised over the previous 12 months.
Using this method, MRR of €4,000 produces ARR of €48,000. That is the calculation below. You do not need to wait a full year to calculate it, and your customers do not all need annual subscriptions.
A concrete example
From monthly level to annual run rate
Illustrative example using the same active subscriptions on one measurement date.
ARR (annual run rate) = MRR × 12
- MRR on the measurement date
- €4,000
- Months used to annualise it
- 12
- ARR
- €48,000
This expresses the current level on an annual basis. Future new business, cancellations and changes are outside this example.
Use ARR as a guide
ARR does not mean €48,000 has already been invoiced, collected or recognised as revenue. Nor does it guarantee that this amount will arrive next year. Customers may cancel or change their agreements, and prices may change. A forecast needs to consider those movements.
One-time services do not belong in the recurring base. A project sold alongside a subscription can be valuable business, but it does not increase the subscription business in the same way. Separate the recurring part when an invoice contains both.
Give ARR a date and a method
Write “ARR as at 31 October, calculated as MRR × 12” rather than simply “annual revenue”. Readers can then identify both the measurement date and the method. A growth chart only becomes useful when its data points are comparable.
Look at the customers behind the figure as well. One customer accounting for half your ARR creates a different planning situation from many smaller customers. Consider separating the total by product or customer type. Ask whether growth comes from new agreements or existing customers, and use those answers when deciding where to focus your team’s work.
Questions and answers
Does ARR always mean MRR multiplied by 12?
This is a common annual run rate method, and the one used here. Other calculations may use contract values and different inclusion rules. Check the definition before comparing reports.
Can a monthly subscription contribute to ARR?
Yes, when ARR is annualised MRR. A €500 monthly subscription contributes €6,000 to ARR even if the customer has not committed to paying for a whole year.
