Annual recurring revenue
ARR is this month's MRR times twelve: a run rate, not a forecast and not last year's revenue.
Also Run-rate ARR · Committed ARR · Contracted not yet live
ARR is in-month MRR × 12. It is a restatement of the current run rate, not a forecast, not a sum of the trailing twelve months, and not the value of the contract book.
- Formula
ARR = MRR × 12- Unit
- currency per year
- Bounded
- ≥ 0
- Defaults
- run_rate basis · committed ARR and contracted-not-yet-live reported separately
- Biggest lever
- Adding signed-but-unreached ramp steps or not-yet-live contracts — 120,000 becomes 204,000 in the worked example
- Read with
- MRR · Revenue tie-out · Concentration
- Appears in
- Headline metric · Valuation multiple · Covenant
- Switches
- 1 · 0 locked — see the choices
What it measures
ARR exists to make a monthly run rate legible at the scale businesses are discussed and valued at. That is its entire job. Every problem with ARR comes from asking it to do more.
Three distinct quantities are routinely all called “ARR”:
- Run-rate ARR — current MRR × 12. What recurs today, annualized. This is the standard’s default.
- Committed ARR — run rate plus the contracted increases already signed (final ramp steps not yet reached), for live contracts.
- Contracted, not yet live — signed contracts whose service has not started. Real, valuable, and not part of ARR, because ARR describes what is recurring now.
Reporting the second or third as though it were the first is not a rounding difference. It is a different claim about the business.
How it is computed
Run rate (default). ARR at month m = MRR at month m × 12. Nothing else. It is not the sum of the last twelve months of revenue — that quantity is trailing revenue, which for any growing business is materially lower and answers a different question.
Committed. Starting from run-rate MRR, for each live contract carrying a ramp schedule, if the final contracted monthly step exceeds the customer’s current run rate, the difference is added. Contracts that have ended are excluded; contracts that have not started are excluded from committed and reported separately as contracted-not-yet-live.
Committed ARR requires contract data. Where contracts are absent, the standard reports run rate only and says so rather than inferring commitment from billing patterns.
Worked example
Four customers at a March cutoff:
| Customer | MRR (Mar) | Contract detail |
|---|---|---|
| A | 5,000 | flat, 18 months remaining |
| B | 3,000 | ramps to 6,000 in September |
| C | 2,000 | contract ends 31 March, not renewing |
| D | 0 | signed; service starts 1 May at 4,000/mo |
- Run-rate ARR = (5,000 + 3,000 + 2,000) × 12 = 120,000. Customer C is included because C is still live in March; the non-renewal shows as churn in April, and because C’s contract has expired the trailing-gap rule treats it as definite churn rather than indeterminate.
- Committed ARR = run rate + B’s ramp gap (6,000 − 3,000 = 3,000/mo) = 120,000 + 36,000 = 156,000.
- Contracted, not yet live = D at 4,000/mo = 48,000, reported as its own line, never inside either ARR figure.
A company describing itself as “at 204,000 ARR” — committed plus contracted-not-yet-live — is not lying so much as answering a question nobody asked. The three figures are 120,000, 156,000 and 48,000, and only the first is ARR under this standard.
The choices that change the number
arr_basis.run_rate(default) annualizes current MRR.contract_acvderives from contract values instead, which shifts the measure from what is recurring to what is contracted and materially changes ramp-heavy books.- Whether usage is in the base. ARR inherits MRR’s definition, and MRR excludes usage by type. Companies with large metered lines often quote an “ARR” that includes annualized usage; that figure is legitimate only if labelled, because usage can fall without anyone cancelling.
- The month chosen. ARR is a spot measure. A month with an unusual billing event annualizes that oddity twelvefold. Seasonal businesses should be read on a trend, never a point.
How it is misread
Peak-month ARR. Selecting the best recent month and annualizing it. Detected by comparing the ARR month against the trend on the ARR/MRR build.
Annualizing non-recurring revenue. A one-time implementation fee multiplied by twelve is the most expensive arithmetic in software finance.
Committed ARR reported as ARR. Defensible as a metric, indefensible as a label. The gap between the two is exactly the contracted-but-not-yet-earned increase, and a reader is entitled to see it separately.
ARR compared against trailing revenue. A company growing 100% year over year will show run-rate ARR far above trailing twelve-month revenue. Neither number is wrong; comparing them without noting the difference produces a phantom discrepancy — or conceals a real one.
What it cannot tell you
ARR is a snapshot of a run rate and cannot express duration, cancellability, concentration or collectability. A book of 120,000 ARR from one customer on thirty days’ notice and 120,000 from forty customers on three-year terms are identical in ARR and entirely different businesses. Those differences live in concentration, contract terms, and retention.
How to state it
A disclosure that travels with the number. Replace the braces; keep the parenthesis.
ARR {x} (SoF Standard v1.0: run-rate · MRR × 12 · usage excluded · net of discounts) Before you quote it
- Run-rate, not committed or contracted-not-yet-live?
- Usage excluded, or the figure labelled usage-inclusive?
- The month chosen sits on the trend, not a peak?
- Net of discounts?
Related questions
- What is the difference between run-rate ARR and committed ARR?
- Run-rate ARR is current MRR times twelve: what recurs today, annualized. Committed ARR adds the contracted ramp steps already signed on live contracts but not yet reached. Signed contracts whose service has not started are a third quantity, contracted-not-yet-live, and belong in neither figure. Under this standard only run-rate ARR may be labelled ARR without qualification.
- Is ARR the sum of the last twelve months of revenue?
- No. That quantity is trailing twelve-month revenue, which for any growing business is materially lower than run-rate ARR and answers a different question. Comparing the two without noting the difference produces a phantom discrepancy or conceals a real one.
- What is the difference between ARR and a revenue run rate?
- Run-rate ARR annualizes recurring subscription MRR only. A "revenue run rate" that annualizes a recent month's total revenue includes services, usage and one-time fees, and swings with whatever oddity that month contained. Under this standard the first is ARR; the second is not.
- Is annualizing the best recent month legitimate?
- No. ARR is a spot measure of the current run rate, and selecting a peak month annualizes that month's oddity twelvefold. The tell is an ARR month that sits above the trend of the MRR build. Seasonal businesses should be read on a trend, never on a point.
- How are ramp and multi-year contracts counted?
- Run-rate ARR follows the contracted step in force this month. Later steps already signed are added only in committed ARR, reported separately. A contract at 3,000 a month ramping to 6,000 in September is 36,000 of run-rate ARR and 72,000 of committed ARR until the step is reached.
- Do pilots or letters of intent count as ARR?
- A signed contract whose service has not started is contracted-not-yet-live, reported on its own line and inside neither ARR figure. A letter of intent is not a contract. A paid pilot counts only while it bills as a recurring subscription.
- Is ARR net of discounts?
- Yes. ARR is twelve times the MRR actually being charged, after discounts. Quoting list-price ARR overstates the run rate by the discount rate and will not survive the tie-out.
Strategy of Finance. “Annual recurring revenue.” SoF Standard Definitions v1.0 (2026-09-18). https://www.strategyoffinance.com/standards/annual-recurring-revenue/