What is Annual Recurring Revenue (ARR)?

Annual Recurring Revenue (ARR) is the total predictable revenue a business generates from subscription-based services or long-term contracts over the course of a year. ARR reflects the revenue tied to ongoing customer relationships—excluding one-time purchases, setup fees, or variable charges—making it a critical metric for tracking business stability, financial growth, and long-term forecasting.

For businesses operating in programmatic advertising or SaaS, ARR provides a clear, measurable view of recurring revenue, helping teams assess customer retention, optimize pricing strategies, and attract investors who prioritize consistent revenue over transactional sales.

How to Calculate Annual Recurring Revenue (ARR)

To calculate ARR, focus on the revenue generated exclusively from subscription contracts lasting at least one year. The standard formula is:

ARR = (Total revenue from annual subscriptions + Recurring revenue from upgrades and add-ons) - (Revenue lost from downgrades and churn)

Alternatively, if your business operates on monthly recurring revenue (MRR), you can annualize it by using:

ARR = MRR × 12

What to Include in ARR Calculations:

• Revenue from new and renewing annual contracts

• Recurring revenue from upsells, add-ons, and plan upgrades

• Churn impact: subtract revenue lost from downgrades or cancellations

What Not to Include:

• One-time setup or installation fees

• Non-recurring revenue from single transactions

• Free trials or temporary promotional pricing

For example, if a customer signs a two-year contract worth $24,000, the ARR would be $12,000 per year. If another customer downgrades a $6,000 per year subscription to a $3,000 per year plan, the ARR would decrease by $3,000.