What is annual recurring revenue (ARR)?

Written by Madalena Rugeroni, founder of Mazo · Updated 15 September 2026

Annual recurring revenue (ARR) is the yearly value of all active subscription revenue a SaaS company has at a point in time, excluding one-time fees such as setup, implementation or consulting. For monthly subscriptions it is calculated as monthly recurring revenue (MRR) multiplied by 12. It measures the size of the recurring business.

ARR formula

ARR = MRR × 12

ARR = sum of the annualised subscription value of every active, paying customer

Counts: subscription fees from live, paying customers, net of discounts, including recurring add-ons. Doesn't count: setup and services fees, free trials, pilots that haven't converted, and contracts that are signed but not yet started. Variable usage fees have no single standard — many companies report them separately; whatever you choose, be consistent.

Worked example

60 customers on a €100 monthly plan: €6,000 MRR.
10 customers on a €2,400 annual plan: €200 MRR each, so €2,000 MRR.
One €5,000 onboarding fee this month: excluded.
One €12,000 contract signed, starting next quarter: excluded from ARR, tracked as contracted ARR.

MRR = €8,000, so ARR = €96,000.

ARR vs revenue vs ACV

ARR isn't the revenue in your accounts: it's a run-rate snapshot of the recurring part of the business. A company can book €200,000 of revenue in a year, including services, and exit the year at €150,000 ARR. ACV is the yearly value of one contract; ARR adds up all of them.

Why ARR matters from €0 to €1M ARR

Pre-revenue: ARR is zero, and that's fine. The signals that matter are commitments — pre-orders, paid pilots, signed letters of intent.
Around €10k MRR (€120k ARR): MRR is usually the more useful operating number. ARR is for comparing with the market.
€50k+ MRR (€600k+ ARR): €1M ARR is about €83,300 in MRR. At this point investors ask for ARR, its growth trend, and how much of it comes back each year (net revenue retention).

Mazo's rule of thumb: report ARR from live, paying subscriptions, net of discounts, and keep signed-but-not-live deals in a separate contracted ARR line — investors flag it when the two are blurred. Watch the trend in growth rate, not one good month: a slowing growth rate matters more than the absolute number.

Common ARR mistakes

Counting one-time fees. Setup and consulting revenue doesn't recur.
Multiplying a prepayment by 12. A €2,400 annual payment is €2,400 of ARR, not €28,800.
Annualising a pilot or a usage spike. One unusual month isn't a run rate.
Reporting list price. Heavy discounts to close are a red flag investors look for.

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FAQ

How do you calculate ARR from MRR?

Multiply monthly recurring revenue by 12. A company with €8,000 in MRR has €96,000 in ARR.

Is ARR the same as annual revenue?

No. ARR is a snapshot of recurring subscription revenue annualised at a point in time. Annual revenue is what was actually earned over the year and includes one-time fees such as setup and services.

Do signed contracts that have not started count as ARR?

They should not. Track them as contracted ARR in a separate line and move them into ARR when the subscription goes live and billing starts.

Who wrote this

Madalena Rugeroni built Mazo. She's an ex-Googler, a startup advisor and investor, and runs a portfolio of internet companies. Before that, as Head of Growth at Amplemarket, she scaled a B2B SaaS to $10M ARR. LinkedIn

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