Contracted recurring revenue, annualised, at a point in time. Services, one-off fees, overages and usage above committed minimums are not recurring and do not belong in it, however reliably they recur in practice.

What is the difference between ARR and revenue?

ARR is a forward-looking snapshot of contracted run rate; recognised revenue is backward-looking and follows accounting rules. They diverge on timing, and reporting one as the other is a common source of reconciliation failures.

Should usage-based revenue be in ARR?

Only the committed minimum. Annualising variable usage turns a snapshot into a forecast and imports volatility into a metric whose value is that it is stable.

How is ARR affected by contract length?

It should not be — a three-year contract annualises to the same ARR as a one-year one at the same annual value. Where longer contracts inflate ARR, total contract value is being reported under the wrong name.

Annual Recurring Revenue (ARR)

The annualised value of recurring subscription revenue at a point in time. A run rate, not a measure of revenue earned during a period.

What it measures

The annualised value of recurring contracts in force at a moment. It is a run-rate snapshot, not a period of earnings, and its usefulness comes from being stable enough to compare across dates.

What belongs in it

Inclusion decisions

Item	In ARR?	Reason
Committed subscription value	Yes	Contracted and recurring
Usage above committed minimum	No	Variable; annualising it forecasts
Implementation and services	No	Non-recurring by definition
Multi-year contract, annualised	Yes, at annual value	Length does not change run rate
Contracts in notice period	Disclose separately	Contracted now, known to end

Source: Distinctions stated here

The most common inflation

Counting total contract value rather than the annual value of a multi-year deal. It triples ARR on a three-year contract and makes the metric incomparable to every prior period and every peer.

Reconciling ARR to revenue

ARR and recognised revenue should differ, and the difference should be explainable. Where the bridge cannot be constructed — starting ARR, plus new, plus expansion, less contraction, less churn, equals ending ARR — the components are being computed from different sources or different definitions, which is a finding worth pursuing.

Where it misleads

It gives equal weight to a contract signed yesterday and one renewing next month, which carry very different risk.
It is a snapshot, so timing near a period boundary can move it materially without anything real changing.
It says nothing about margin. Two businesses with equal ARR and different cost of service are not comparable, and ARR multiples applied across them are not either.

How to compute a figure that reconciles

Annualise the recurring component only. One-off services, overages and professional fees are revenue but not recurring, and including them makes ARR move with delivery.
Use contracted value at a point in time, not trailing revenue. ARR is a run-rate snapshot; trailing revenue is history, and mixing them produces a figure that reconciles to nothing.
Decide how usage-based revenue is treated and write it down. Annualising a variable month is a modelling choice with a large effect.
Reconcile opening ARR plus net new against closing ARR every period. Where it does not tie out, something is being counted on two different bases.
Handle multi-year contracts on the annualised value, not the total. A three-year deal adds one year of ARR, not three.

RELATED TERMS

Bookings

The total value of contracts signed in a period, regardless of when revenue is recognised or cash collected.

Monthly Recurring Revenue (MRR)

The normalised monthly value of recurring subscription revenue. The same quantity as ARR at a finer resolution, and the base for movement analysis.

Net New ARR

The change in ARR over a period: new plus expansion minus contraction minus churn. The headline growth number.

Net Revenue Retention (NRR)

Revenue retained from an existing cohort over a period including expansion, expressed as a percentage of where that cohort started. The clearest single indicator of whether the base grows without new customers.

COMMON QUESTIONS

What counts as ARR?: Contracted recurring revenue, annualised, at a point in time. Services, one-off fees, overages and usage above committed minimums are not recurring and do not belong in it, however reliably they recur in practice.
What is the difference between ARR and revenue?: ARR is a forward-looking snapshot of contracted run rate; recognised revenue is backward-looking and follows accounting rules. They diverge on timing, and reporting one as the other is a common source of reconciliation failures.
Should usage-based revenue be in ARR?: Only the committed minimum. Annualising variable usage turns a snapshot into a forecast and imports volatility into a metric whose value is that it is stable.
How is ARR affected by contract length?: It should not be — a three-year contract annualises to the same ARR as a one-year one at the same annual value. Where longer contracts inflate ARR, total contract value is being reported under the wrong name.