The formula and what counts as recurring
ARR = MRR x 12, or the sum of annualized values of active subscription contracts. The critical constraint is the word recurring. Revenue that does not automatically renew or is not contractually obligated to continue does not belong in ARR.Common exclusions: one-time implementation fees, professional services that are not under a recurring contract, usage-based charges that vary month to month without a contracted floor. Variable usage revenue can be included in ARR if there is a committed minimum, but only the minimum floor should be counted.
For monthly subscriptions, MRR is the base and ARR is MRR x 12. For annual contracts, ARR is the total contract value divided by the contract term in years, then summed across all active contracts.
The four ARR movement components
Tracking total ARR as a single number tells you where you are. Tracking the four movement components tells you how you got there and where you are headed.
| ARR Component | Definition | What It Measures |
|---|---|---|
| New ARR | ARR from new customer logos in the period | Sales acquisition performance |
| Expansion ARR | ARR from upsells and cross-sells to existing customers | Account growth and land-and-expand motion |
| Contraction ARR | ARR lost from existing customers who downgraded | Early churn signal, product-value problem |
| Churned ARR | ARR lost from full cancellations | Retention performance |
Why each component needs its own line
A company can grow total ARR while losing ground on net new customer acquisition, if expansion from the existing base is outpacing new logo wins. The aggregate hides the mix. Equally, a company can show flat ARR while experiencing both high churn and high new bookings, which indicates a leaky bucket problem that aggregate ARR does not surface.
Board and investor reporting typically requires all four components. Operations teams need them to diagnose where revenue is being created and destroyed and to attribute performance correctly across sales, customer success, and product.
ARR vs MRR: which to use
ARR is the standard for annual contract businesses and for board-level reporting. MRR is more useful for month-to-month businesses or for teams that need to track short-interval changes in the recurring revenue base. For B2B SaaS on annual contracts, ARR vs MRR is largely a reporting convention choice, but the underlying data should support both.
Net New ARR is the most operationally important derived metric: it is the single number that reflects whether the business is growing its recurring revenue base in a given period. Annual recurring revenue totals show where you are. Net new ARR shows how fast you are growing and whether that growth is healthy.Frequently Asked Questions
What is the ARR formula?
The simplest form is ARR = MRR x 12, where MRR is total monthly recurring revenue from active subscriptions. For annual contracts, ARR is the sum of all annualized contract values. One-time fees, professional services, and usage charges that are not contractually recurring should be excluded.
What are the four components of ARR movement?
New ARR (from new logos), Expansion ARR (from upsells and cross-sells to existing customers), Contraction ARR (from downgrades), and Churned ARR (from cancellations). Net New ARR = New ARR + Expansion ARR minus Contraction ARR minus Churned ARR.
Should multi-year contracts be annualized for ARR?
Yes. A three-year contract for $300,000 total contributes $100,000 to ARR, not $300,000. ARR represents what recurs annually. Counting the full contract value inflates ARR and misrepresents the business's recurring revenue base.
Put these metrics to work
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