Annual recurring revenue: the formula and what stays out

Annual recurring revenue (ARR) is the yearly value of the subscriptions a SaaS company bills again and again. The formula: ARR = recurring MRR × 12. Setup fees, one-off services, VAT and usage that does not repeat stay out. On a product with 1,100 customers at €60 a month, annual recurring revenue is €792,000.

ARR is not MRR with a bigger number. Every monthly movement is twelve times larger in ARR, and a one-off fee counted as recurring inflates the figure next year's plan is built on.

Annual recurring revenue is recurring MRR times 12: subscriptions only, net of VAT, without setup fees, services or one-off usage. On a product with 1,100 customers at €60 a month, ARR is €792,000. Counting a €50 setup fee on 44 new customers a month as recurring adds €26,400 that never renews.

Key takeaways

• Annual recurring revenue is recurring MRR times 12: €66,000 × 12 = €792,000 on the example product.
• Setup fees, services, VAT and metered usage stay out, because none of them repeats.
• A €50 setup fee on 44 new customers a month, annualized, adds €26,400 that never renews.
• Every monthly change is twelve times larger in ARR: €2,640 of churned MRR is €31,680 of ARR.
• This week: split last month's billing into subscriptions, one-off fees, usage and tax, and multiply only subscriptions.

How to calculate ARR from MRR

Start from monthly recurring revenue. Stripe defines MRR as "the sum of the monthly-normalized value of all your active and past_due subscriptions" (Stripe Docs). Monthly-normalized means an annual plan at €600 counts as €50 a month.

ARR = recurring MRR × 12

recurring MRR = monthly value of active subscriptions,
                annual plans at a twelfth of their price

The product this blog's SaaS posts use has 1,100 paying customers at €60 a month:

MRR = 1,100 × €60  = €66,000
ARR = €66,000 × 12 = €792,000

ChartMogul writes the same shortcut: "Formula: Annualized Run Rate = MRR × 12." (ChartMogul).

What annual recurring revenue leaves out

ARR answers one question: how much revenue repeats if nothing changes. Anything that does not repeat stays out.

• Setup fees and services. Paddle's guide says: "Any one-time options should not be included in this calculation." (Paddle).
• Taxes. "MRR calculations exclude any taxes applied to the subscription", per Stripe.
• Usage that does not repeat. Stripe's MRR also leaves out "any subscribers on free plans, and any metered (usage based) products".
• Discounts, by one rule. Stripe lets each company choose whether discounts count. Pick one rule and keep it every month.

The setup fee is where the number usually inflates. Say the product charges €50 to set up each account, and 44 new customers join each month:

Setup fees in the month = 44 × €50      = €2,200
Counted as MRR, × 12    = €2,200 × 12   = €26,400 of ARR

Those €26,400 never renew. On top of €792,000, it is one euro of fees for every 30 euros that do repeat. ChartMogul names the error directly: "Common mistake: folding one-time fees or services revenue into ARR overstates predictable, recurring revenue."

ARR vs MRR: same base, times twelve

Paddle puts the difference simply: "The main difference between ARR and MRR is that ARR is calculated annually while MRR is calculated monthly." The base is the same, so every monthly change multiplies by twelve.

Net new MRR in a month   = €660    →  net new ARR = €7,920
44 customers cancel × €60 = €2,640 of MRR → €31,680 of ARR

That second line is why the SaaS churn rate weighs so much in an annual plan: 4 customers of every 100 leaving each month takes €31,680 out of ARR before any new customer counts. Expansion works the other way, which is what net revenue retention measures.

Annual recurring revenue or annualized run rate

The letters ARR carry two meanings. ChartMogul: "In modern SaaS, ARR usually means Annualized Run Rate: your Monthly Recurring Revenue (MRR) multiplied by 12." And: "The stricter definition, Annual Recurring Revenue, counts only contracts of 12 months or longer."

On the example product, both give €792,000 only if every customer is on an annual plan. With monthly plans, the strict definition counts less. The trade-off between the two plan types is in annual vs monthly subscription. State which definition the number uses before anyone plans on it.

In the EU, ARR starts net of VAT

A price on a European pricing page often includes VAT, and that money is never ARR. The EU's Your Europe portal says electronic services sold to consumers are services "which are always taxed in the customer's country" (Your Europe). For business customers in another EU country, "you don't usually need to charge your customers VAT": they pay it themselves.

The same €60 can be net for a studio with a VAT number and gross for a consumer. If the example's €60 included Spain's 21% standard rate (Your Europe):

Net price = €60 ÷ 1.21               = €49.59
ARR       = 1,100 × (€60 ÷ 1.21) × 12 ≈ €654,545
Tax counted as ARR = €792,000 − €654,545 ≈ €137,455

That gap belongs to the tax authority, not to the plan. It is also why a SaaS pricing strategy for Europe decides early whether prices are shown with VAT or without it.

The annual recurring revenue number for your product

ARR = (subscription MRR, net of VAT, without one-off fees or metered usage) × 12

On the example product: €66,000 × 12 = €792,000. A €50 setup fee on 44 new customers a month, counted as recurring, adds €26,400 that never renews.

What to do by Monday: export last month's billing and split it into four lines: subscriptions, one-off fees, usage and tax. Multiply only the first by twelve, and write down which ARR definition the number uses.

Work through this with your own numbers

Here is last month's billing for my SaaS product: [total subscription revenue for the month, with annual plans at a twelfth of their price], [one-off fees such as setup or onboarding], [metered usage revenue], [VAT collected] and [discounts applied]. Calculate my annual recurring revenue as recurring MRR × 12, counting only subscriptions, net of VAT and without one-off fees or metered usage. Tell me which rule I used for discounts and keep it. Then show how much my ARR would be overstated if the one-off fees and the VAT were counted as recurring. Finally, with my [customers who canceled last month] and my [average monthly price], calculate how much ARR that churn removed. Show every step of the arithmetic.

FAQ

How do you calculate ARR?

Multiply recurring MRR by 12. Recurring MRR is the monthly value of active subscriptions, with annual plans at a twelfth of their price, net of VAT and without one-off fees. At €66,000 of MRR, ARR is €792,000.

Is ARR the same as revenue?

No. Total revenue also includes setup fees, services and other one-off charges. ARR keeps only what repeats, so it is usually lower than the revenue on the income statement.

Do monthly plans count in ARR?

In the common run-rate sense, yes: ARR is MRR times 12, monthly plans included. Under the stricter definition, only contracts of 12 months or longer count. Say which one the number uses.

Should ARR include VAT?

No. VAT is collected for the tax authority. If a €60 price includes Spain's 21% standard rate, only €49.59 a month counts, and ARR on 1,100 customers falls from €792,000 to about €654,545.

The Activation Audit maps what makes customers stay: five business days, $500, and the map stays with you whether or not you hire anyone.