Annual recurring revenue (ARR)
ARR is the annualized value of contracted recurring revenue at a point in time, a management metric, not a GAAP one.
Because ARR is not defined by an accounting standard, every company defines it. The consequential choices are which revenue counts as recurring (usage? services? one-time?), whether it is measured on contracted or active subscriptions, and how mid-term amendments are annualized. A defensible ARR definition is written down and change-controlled.
ARR is also the base for the retention metrics, which means an ARR definition change silently restates NRR, GRR and cohort analyses. This coupling is why ARR belongs to the metric governance layer rather than to whichever team reports it.
Where it breaks
Usage-based revenue is annualized from a peak month, inflating ARR against a base that does not repeat.
Related terms
- Net revenue retention (NRR)
- NRR is ending recurring contracted value for a starting cohort divided by that cohort’s starting recurring contracted value, after churn, contraction, and expansion and excluding new customers.
- Bookings
- A booking is the contractual commitment a customer has made, distinct from billings, which is what has been invoiced, and from revenue, which is what has been earned.
- Metric definition
- A metric definition is the governed specification of a measure, its formula, source fields, filters, grain, owner and known limitations.
- Cohort analysis
- Cohort analysis groups records by a shared start event and follows that fixed group over time, which is the only way to separate mix change from behavior change.
Field notes on this
- Four clocks: bookings, billings, revenue, and cash
Commercial commitment, invoicing, recognition, and collection answer different questions. Reconcile the clocks without treating them as one metric.