What Is ARR? Annual Recurring Revenue Explained

Annual Recurring Revenue, or ARR, is the total amount of predictable revenue your subscription business expects to generate over the next twelve months. It is the single metric that investors, boards, and operators use to benchmark SaaS companies against each other, and it is the number that determines whether you are at seed stage, Series A territory, or approaching an IPO.

Despite its importance, ARR is frequently miscalculated. Founders include one-time fees, forget to subtract churned contracts, or confuse ARR with annualized run rate. This guide covers the correct formula, when to use ARR instead of MRR, the milestones that matter, and the mistakes that will mislead you.

The ARR Formula

The standard formula is straightforward:

ARR = (Sum of annual subscription revenue) + (Sum of monthly subscription revenue x 12) − (Churned annual revenue)

If you have 50 customers on a $1,200/year plan and 200 customers on a $100/month plan, and you lost $24,000 in annual contracts this year, your ARR is:

(50 x $1,200) + (200 x $100 x 12) − $24,000 = $60,000 + $240,000 − $24,000 = $276,000 ARR

Only recurring revenue belongs in this calculation. Investopedia defines recurring revenue as income that a company expects to continue at regular intervals. One-time setup fees, consulting projects, and usage overages that are not committed should be excluded.

ARR vs MRR: When to Use Each

ARR and MRR measure the same underlying concept at different time scales. MRR is your monthly recurring revenue; ARR is simply MRR multiplied by twelve. So why do both exist?

• MRR is better for month-to-month operational decisions. It shows the immediate impact of new sales, churn, and expansion. Most SaaS operators track MRR daily or weekly.
• ARR is the language of fundraising, valuation, and long-range planning. When a VC asks your revenue, they mean ARR. When a SaaS company says it crossed $10M, it means $10M ARR.

If your business is primarily annual contracts, ARR is the natural metric. If you are primarily monthly subscriptions, you likely track MRR day to day and report ARR to investors. Either way, you need both. Learn how to track ARR automatically from Stripe without spreadsheets.

Key ARR Milestones for SaaS

The SaaS industry has informal but widely recognized ARR milestones that signal company maturity. As SaaStr has documented extensively, each milestone comes with its own challenges:

• $1M ARR— product-market fit confirmed. You have enough paying customers to prove the problem is real and your solution is worth paying for.
• $5M ARR— repeatability. You have found at least one scalable acquisition channel and can hire a small sales or marketing team.
• $10M ARR— Series B territory. At this stage, investors expect you to show strong unit economics, net revenue retention above 100%, and a clear path to $50M.
• $100M ARR— IPO-readiness. Only a small percentage of SaaS companies reach this milestone, and those that do typically command valuations of 10-30x ARR.

Common ARR Mistakes

Getting ARR wrong does not just produce a bad chart. It misleads your investors, distorts your forecasts, and can create legal problems if you report inflated numbers during fundraising. Here are the mistakes we see most often:

• Including one-time revenue. Setup fees, implementation charges, and hardware sales are not recurring. They should be tracked separately.
• Counting churned contracts. If a customer on an annual plan cancelled three months in, you should remove the remaining nine months of expected revenue from your ARR immediately, not at the end of the contract.
• Mixing committed and uncommitted usage. If customers pay a base subscription plus metered usage, only the committed base belongs in ARR. Variable usage can be reported as a separate line item.
• Confusing ARR with annualized run rate. Annualized run rate takes a recent period (often one month) and extrapolates it to a year. ARR is the actual sum of active contracts. If you had a one-time spike month, annualized run rate will overstate your true ARR dramatically.

Automating your Stripe billing data into a dedicated analytics tool eliminates most of these errors. StripeReport pulls directly from your subscription objects and calculates ARR using only committed recurring revenue.

How to Track ARR in Practice

Spreadsheets work when you have ten customers. They break when you have a thousand. The most reliable approach is to connect your billing system to a tool that calculates ARR in real time. For a breakdown of the key SaaS metrics every Stripe user should monitor, see our SaaS metrics explained guide.

StripeReport connects to Stripe in under two minutes with a read-only API key and starts computing ARR, MRR, churn, ARPU, and LTV immediately. You get a daily email with your current ARR and how it changed, so you never have to wonder where you stand.

Wrapping Up

ARR is the foundation of SaaS valuation and planning. Getting it right means including only committed recurring revenue, subtracting churn promptly, and using a consistent methodology that your investors and team can trust. Whether you are tracking your first $100K or approaching $10M, the discipline starts with accurate data. Connect your Stripe account to StripeReport and see your real ARR today.