Glossary

What is ARR?

2 min read

Annual recurring revenue is monthly recurring revenue multiplied by twelve. That is the entire definition, and resisting the urge to make it more interesting is most of the discipline.

Why bother with it at all

ARR and MRR carry exactly the same information, so the choice between them is about audience rather than accuracy.

MRR is the operating number. It moves visibly week to week, which makes it the one to watch while you are building.

ARR is the conversational number. Investors, acquirers and benchmarks all speak in it, and "we are at $480k ARR" lands differently from "we are at $40k MRR" despite being identical.

Use whichever your reader thinks in. Never put both on the same chart.

The three ways ARR gets inflated

ARR is easy to overstate without saying anything untrue, which is why it is worth knowing the moves.

Annualising a good month. Taking December's revenue, multiplying by twelve, and calling it ARR. December included Black Friday one-off sales, which are not recurring, and the figure is a forecast rather than a run rate.

Counting one-off revenue. Setup fees, consulting, lifetime deals and one-time purchases are real money and they are not recurring. An ARR that includes them is answering a different question.

Counting bookings as revenue. A signed annual contract starting next quarter is a booking. Adding it to ARR today reports revenue you have not begun to earn.

All three produce a number that is bigger and less useful. The test is simple: if everything stopped changing today, would this amount arrive over the next twelve months? If not, it is not ARR.

ARR and cash are different things

A business at $120k ARR selling annual plans may have collected most of that already. The same business selling monthly has collected a twelfth of it.

Identical ARR, completely different runway. ARR describes the book. It says nothing about when the money arrives, which is the thing that decides whether you make payroll.

Why Notch Metrics reports MRR

Every revenue connector reports MRR rather than ARR: Stripe, Polar, Paddle, Dodo Payments, Lemon Squeezy and RevenueCat.

The reason is that MRR moves at a speed you can see. In the notch, a figure that changes visibly during a good week is worth more than one that needs a calculator to feel different. Multiply by twelve when somebody asks.

Questions

What does ARR stand for?
Annual recurring revenue. It is monthly recurring revenue multiplied by twelve, and nothing else. The two carry identical information, so the choice between them is about audience rather than accuracy.
Is ARR just MRR times 12?
Yes. Anything smoothed, forecast or annualised differently is not ARR, it is a projection wearing a metric's name.
Can I include one-off sales in ARR?
No. Setup fees, consulting, lifetime deals and one-time purchases are real money and they are not recurring. The test is whether the amount would arrive over the next twelve months if everything stopped changing today.
Is ARR the same as cash in the bank?
No. A business at $120k ARR selling annual plans may have collected most of it already; the same business selling monthly has collected a twelfth. Identical ARR, completely different runway.
Should I report ARR or MRR?
MRR while you are building, because it moves visibly week to week. ARR when talking to investors, acquirers or benchmarks, because that is the unit they think in. Never put both on the same chart.