How to calculate ARR
ARR is the annualized value of your recurring revenue, the north-star metric for subscription businesses. It powers valuation, planning, and growth math. The discipline is in what you include: only recurring revenue counts, and it must be net of churn.
Short answer
Calculate ARR (annual recurring revenue) by summing the annualized value of all active recurring subscriptions: multiply monthly recurring revenue by 12, or sum each annual contract's recurring value. Include recurring add-ons, exclude one-time fees and usage overages, and net out churn and downgrades for a true figure.
Step by step
Identify recurring revenue only
Include subscription fees and recurring add-ons. Exclude one-time setup, professional services, and variable usage overages that are not contractually recurring.
Annualize it
Multiply MRR by 12, or sum the annual recurring value of each contract regardless of billing frequency.
- ARR = MRR x 12
- Or ARR = sum of each contract's annual recurring value
- Exclude one-time fees and non-recurring usage
Account for contract terms
Normalize multi-year deals to their annual recurring value so a 3-year contract counts its yearly figure, not the total.
Net out churn and changes
Subtract churned and downgraded ARR and add expansion to reflect the live, current run rate rather than gross bookings.
Reconcile to your billing system
Tie the ARR number back to active subscriptions in billing so it is auditable and not a spreadsheet guess.
How Ardovo helps
Because Ardovo's deals, quotes, and billing share one source of truth, ARR derives directly from active subscriptions and always ties out. Rook can break ARR into new, expansion, and churned components for any period on request.
Frequently asked questions
What is the difference between ARR and revenue?
ARR is the annualized run rate of recurring subscriptions at a point in time. Revenue (recognized) is what you actually earned over a period under accounting rules, including one-time fees. ARR is a forward run rate, recognized revenue is a historical result.
Should one-time fees be included in ARR?
No. ARR is strictly recurring. Setup fees, professional services, and one-off charges are excluded because they do not repeat. Including them inflates ARR and misrepresents your recurring run rate.
How do multi-year contracts affect ARR?
Count only the annual recurring value, not the total contract value. A 3-year, 300,000 dollar deal contributes 100,000 to ARR per year, not 300,000. Total contract value is a separate metric.