ARR: what is Annual Recurring Revenue?

The simplest formula:

ARR = MRR × 12

(MRR = Monthly Recurring Revenue, the monthly sum of active subscriptions.)

Example: an SME SaaS has 100 customers each paying €50/month.

• MRR = 100 × 50 = €5,000
• ARR = 5,000 × 12 = €60,000

If a customer pays €600/year upfront: ARR = €600 for that customer (annualised). If a customer pays €1,800 for 3 years: ARR = €600/year for that customer (smoothed).

What ARR does NOT include:

• One-off setup fees (one-time installation costs)
• One-off training sessions
• Billed consulting hours
• Exceptional revenue

This discipline is important to provide a predictable revenue picture—this is what investors and acquirers look at first.

MRR is more practical for monthly management; ARR is more strategic for external communication (boards, investors, valuation).

Total revenue remains the legal/tax indicator—but it says nothing about business predictability. €100k revenue with €80k one-off + €20k recurring is not the same as €100k with €90k recurring + €10k one-off. In the second case, you start the next year with €90k already secured.

The Net New ARR is the monthly change in ARR. Formula:

Net New ARR = New ARR + Expansion ARR − Contraction ARR − Churn ARR

• New ARR: new customers signed in the month (e.g. 3 new customers × €600/year = €1,800 new ARR).
• Expansion ARR: upsells/cross-sells to existing customers (e.g. 5 customers upgrade from €50 to €80/month = (30 × 12 × 5) = €1,800 expansion).
• Contraction ARR: downgrades by existing customers (switching to a cheaper plan).
• Churn ARR: ARR lost from customers who cancel (e.g. 2 customers at €50/month cancel = (50 × 12 × 2) = €1,200 churn).

Tracking this breakdown monthly helps identify growth levers: if churn exceeds expansion, invest in customer success. If new ARR plateaus, invest in marketing/sales.