What is ARR and how do you calculate it?
22 June 2026
22 June 2026
ARR (Annual Recurring Revenues) is the total contracted, recurring revenue a SaaS company expects to generate over a 12-month period.
The simple formula: MRR × 12 = ARR.
However, ARR often contains several revenue streams, and there can be confusion about which to include, particularly around usage-based components, multi-year contracts, and recurring support fees.
Most SaaS businesses have several recurring revenue streams,. subscriptions, usage-based fees, recurring services agreements and best practice is to treat them separately, not lump them together. Each stream has different margins, different predictability, and tells a different story about the scalability of your business.
ARR is one of the core metrics in our SaaS KPI dashboard, see the top SaaS KPIs to track in 2026 for the full framework.
In this article, we break down the different components of ARR, which streams to include, and why separating them gives you a more accurate picture of your company's financial health.
Recurring revenue is a broader term that encompasses both subscription and transactional revenue. It represents the portion of a SaaS company’s revenue that we expect to continue in the future, excluding one-time or non-repeating payments. By focusing on recurring revenue, SaaS businesses can gauge their stability and ability to sustain growth over time.
As the SaaS business model has proved itself to be robust in challenging economic environments, an increasing number of businesses have considered implementing a subscription-like business model for multiple products and services, such as professional services, hardware, etc. The challenge, however, with treating recurring revenue as your go-to ARR metric is that the different revenue streams are very different in nature.
We won’t argue that this is a step in the wrong direction (by all means, we love the subscription model!). However, we believe best practice is to distinguish between the different types of recurring revenue in your business. This provides better visibility into your business mechanics which will prove itself to be very valuable when scaling your business.
Subscription revenue is the bedrock of ARR for most SaaS businesses. This refers to the income generated from recurring monthly or annual subscriptions customers pay to access the software service.
This predictable revenue stream provides a stable foundation for a SaaS company’s finances. To calculate subscription ARR, multiply the monthly recurring revenue from license subscriptions by the factor of 12.
Another revenue stream we often see included in the ARR metric is transactions. Over time, in the hunt for yield, SaaS companies have decomposed their delivery model, looking for ways to monetize different aspects of their platform. As some of this functionality is usage-based or consumption-based, revenue is typically generated when customers pay for specific actions or additional services within the SaaS platform. These actions could include data storage, API calls, or other usage-related charges such as signatures, log-ins, published ads, etc.
As this revenue stream often scales with the number of users/customers, it makes sense in many ways to include it as part of the ARR. In fact, when the market is in your favor, it acts like a subscription model on steroids. Depending on the product’s nature, however, things can look quite different when the markets change.
In economic slowdowns, a large part of the demand will fall short due to natural changes in behavior and needs. In such a situation, it is hard to argue that a transactional business model comes with the same robustness as a subscription model does, as transactional revenue can be variable and less predictable compared to subscription revenue. Therefore, we prefer transactional revenue streams to be treated on their own as re-occurring revenue in parallel to the ARR unless the transactions are consistently growing, then we could argue to include transactions as part of the ARR. In any case, it would make sense to highlight whether the revenue streams stems from transactions or subscriptions.
As for transactions, many companies have revenue stemming from in-house consultancy and services. To make this revenue stream more predictable, we have seen several examples of customers signing up for annual consultancy or service agreements. Although this is a good way of keeping your consultants off the bench and monetizing on your know-how, you lose flexibility. Therefore, you could set yourself up to allocate an increasing amount of capital to a non-core part of your business to handle demand.
Finally, although distinguishing between truly recurring revenues and transactions may seem reasonable, there are revenue streams that fall in between the two definitions. These are typically revenues with a campaign-like pattern where they are not naturally recurring, but you still expect that they will re-occur regularly. Examples of such revenues could be campaigns within Martech where seasonality and budgets could be leading to shorter periods of revenues, and where you expect new campaigns will generate similar revenues in the future. We argue that these revenue streams should be treated as re-occurring revenues separated from recurring revenues.
The main reason revenue streams should be separated is that they are quite different by nature. Various products and services have differing costs of goods sold (SaaS COGS, including Support, services, transaction costs, Customer Success, Hardware, and Dev Ops), meaning SaaS gross margins (GM) differ across the revenue streams. Knowing your GM is crucial when assessing the scalability of your business, which has a huge impact on your valuation.
For cloud-based software products, the GM is generally high, typically in the 70-80% range. A high GM indicates a high potential for scalability, which makes sense as you can sell the same digital product repeatedly at a limited marginal cost. If your software component yields sub 70% GM, you should investigate how efficient your delivery model is as it indicates your offering is too operations-heavy. When we look at transactions, services, and hardware, margins typically vary anywhere from 5% and upwards and are usually impacted by seasonality and cyclical headwinds.
These two measures are often confused.
Activated ARR refers to the revenue that comes from active contracts. Let´s say you have just sold a subscription to a new customer, but the contract has a start date one month from now. Then, you should not include the contract value in today’s ARR but rather in a month when the contract has been activated and generates a revenue stream. In the same way, a customer who communicates they will churn at the end of their current contract is often removed from the reported ARR at the time of notification. When using this approach, however, we need to remember that there are contractual agreements in place, such as our potential to win back a churned customer by entering a negotiation during the time window the notice period grants us. Therefore, we prefer to include churned customers in as part of the reported Annual Recurring Revenue until the customer actually leaves.
Although activated ARR gives us a real-time view of the contractual arrangements, we prefer using Contracted Annual Revenue (CARR). CARR is a subset of ARR representing the guaranteed, contracted income from annual subscriptions. This includes any contracts signed (new sell, upsell, net expansion, and price increases), but not yet activated, and even communicated churned contracts until they are out of the books. CARR is especially significant for SaaS companies as it reflects the revenue they can count on from long-term commitments.
CARR provides a sense of security and stability, as it represents locked-in revenue for the coming year. This allows SaaS businesses to make informed decisions about resource allocation and growth strategies and is the metric we refer to when discussing ARR.
ARR is not a single number, it's a composition. Subscription revenue, transactional revenue, campaign-based revenue, and contracted-but-not-yet-active deals all behave differently, carry different margins, and tell different stories about your business.
Decompose them. It will make you a better operator, and it will make you a more credible counterpart when the time comes to raise capital or run an exit process.
Once ARR is defined properly, the next question is what happens to it. See net revenue retention for how the installed base moves once it's recognized.
Want a one-page reference for ARR alongside the other key SaaS metrics? Download the SaaS KPI cheat sheet.
ARR (Annual Recurring Revenue) is the total contracted, recurring revenue a SaaS company expects to generate over a 12-month period. The simplest calculation: MRR × 12 = ARR.
ARR primarily consists of subscription revenue, recurring monthly or annual license fees. Transactional and campaign-based revenue can be included but should be reported separately, as they behave differently and carry different margins. Blending everything into one ARR figure obscures the composition.
It depends. Transactional and usage-based revenue like API calls, data storage, signatures, logins can be included if it is consistently growing over time. If it fluctuates with market conditions, it should be reported as re-occurring revenue alongside ARR, not inside it.
Activated ARR counts only live, active contracts. A signed deal that starts next month is excluded; a customer who has given notice is removed immediately. CARR (Contracted Annual Recurring Revenue) includes all signed contracts not yet activated and keeps churned customers in the number until they have actually left, making it the better forward-looking metric for planning and investor reporting.
Because each stream has different gross margins. Cloud software typically yields 70–80% gross margin. Transactional, services, and hardware revenue can start as low as 5%. Blending them hides the true scalability of your business, and that matters both operationally and in any valuation or fundraising process.
Re-occurring revenue sits between truly recurring and purely transactional revenue. It follows a campaign-like pattern not contractually recurring, but expected to repeat regularly. Seasonal Martech campaigns are a common example. Best practice is to report re-occurring revenue separately from both subscription ARR and transactional revenue.
Viking Growth's view: keep churned customers in the reported ARR until they have actually left, not at the point of notification. The notice period is a window for negotiation and potential win-back, so removing them early understates the true contracted revenue base.
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