Definition
Annual Recurring Revenue (ARR)
Annual Recurring Revenue (ARR) is the normalized, predictable subscription revenue a business expects over a year, counting only recurring contracts and excluding one-time fees. It is the headline scale metric for subscription companies — a snapshot of the run-rate revenue the customer base would generate over twelve months at the current moment.
Key takeaways
- ARR is normalized yearly recurring subscription revenue at the current run rate, excluding one-time fees like setup or services.
- Monthly plans are tracked as MRR and multiplied by twelve to reconcile with ARR.
- Decompose ARR movement into new, expansion, contraction, and churned to see whether growth is healthy or just outrunning a leaky bucket.
- ARR is a run-rate snapshot, not GAAP revenue — don't confuse it with recognized revenue on financial statements.
ARR counts only recurring revenue: subscription fees, recurring seats, committed usage. One-time charges — setup fees, professional services, hardware — are excluded because they don't recur and would overstate the durable run rate. Monthly subscriptions are typically expressed as MRR (monthly recurring revenue) and multiplied by twelve to reconcile with ARR.
The more revealing view is how ARR moves, decomposed into its components: new ARR from fresh customers, expansion ARR from upgrades and added seats, contraction ARR from downgrades, and churned ARR from cancellations. Net new ARR is expansion plus new minus contraction and churn. This bridge shows whether growth is healthy acquisition, compounding expansion, or merely outrunning a leaky bucket.
ARR is the denominator for much of SaaS analysis — it anchors net revenue retention, the ratio of customer acquisition cost to the lifetime value it buys, and growth-efficiency ratios. Because it is a run-rate snapshot rather than booked or recognized revenue, it should not be confused with GAAP revenue on financial statements.
Planoda visualizes recurring-revenue movement the way it visualizes throughput — new, expansion, and churned ARR rendered as a flow so teams see what is actually driving growth.
Related terms
- Churn RateChurn rate is the percentage of customers (or revenue) lost over a period, calculated as customers lost divided by customers at the start of the period. It is the inverse of retention and the single most-watched health metric for subscription businesses, because small monthly losses compound into large annual ones.
- Customer Lifetime Value (LTV)Customer Lifetime Value (LTV or CLV) is the total profit a business expects to earn from a customer across the entire relationship. A common estimate is average revenue per customer times gross margin, divided by churn rate. LTV quantifies what a customer is truly worth, setting the ceiling on what a business can sensibly spend to acquire and keep them.
- Customer Acquisition Cost (CAC)Customer Acquisition Cost (CAC) is the total sales and marketing spend required to win one new customer, calculated as those fully loaded costs over a period divided by the new customers acquired in it. CAC is half of the core unit-economics equation: a business is viable only when the value a customer returns comfortably exceeds the cost to acquire them.
- Retention RateRetention rate is the percentage of customers (or users) who remain active over a period — the mirror image of churn. Calculated as customers retained divided by customers at the period's start, it measures whether a product delivers durable, repeated value rather than a one-time hit, and underpins almost every other growth metric.
- Conversion RateConversion rate is the percentage of people who complete a desired action out of those who had the opportunity — visitors who sign up, trials that become paid, or leads that close. Calculated as conversions divided by the eligible population, it is the fundamental efficiency measure of any funnel step, isolating how well one transition performs.