Business & Finance · Explainer
Annual recurring revenue (ARR) is the yearly value of your active subscriptions and contracts: what current customers would pay over twelve months if nothing changed. Monthly recurring revenue (MRR) is the same figure for one month, so ARR = MRR × 12. Both exclude VAT (value added tax) and one-off fees.
Not the ARR you were looking for? In business studies and investment appraisal, ARR usually means accounting (or average) rate of return: average annual profit from an investment ÷ the amount invested (initial or average, depending on the syllabus), as a percentage. In medicine it means absolute risk reduction. This article is about annual recurring revenue.
The short version
- MRR = the monthly value of every active subscription, at what customers pay now, excluding VAT and one-off charges.
- ARR = MRR × 12. It is a snapshot, not a forecast, and not the revenue figure in your accounts.
- Convert every billing cycle to a monthly figure first: a weekly price × 52 ÷ 12, never × 4.
- Watch how MRR moves each month: new customers, upgrades and returning customers add to it; downgrades and cancellations take it away.
What is monthly recurring revenue (MRR)?
Recurring revenue is income customers pay on a regular cycle under an ongoing agreement (subscriptions, memberships, service plans, rent, retainers), as opposed to one-off sales. MRR and ARR are the two standard ways of measuring it. Monthly recurring revenue is the predictable income your business can expect each month from those customers. It is the headline figure for any subscription business, because it tells you, before the month starts, how much money you can reasonably expect to arrive.
MRR formula: MRR = the sum of every active customer’s recurring charge, converted to a monthly amount. Put another way: MRR = number of paying customers × average monthly charge. Because businesses bill weekly, every four weeks, quarterly or annually, the conversion matters:
| Billed | To get a monthly figure | Example |
|---|---|---|
| Weekly | × 52 ÷ 12 | £20 a week veg box = £86.67 a month |
| Every four weeks | × 13 ÷ 12 | £15 window clean = £16.25 a month |
| Monthly | as it is | £35 gym membership = £35.00 a month |
| Quarterly (3 months) | ÷ 3 | £36 a quarter = £12.00 a month |
| Annually | ÷ 12 | £350 a year gym membership = £29.17 a month |
The commonest mistake is multiplying a weekly price by four. A year has 52 weeks, not 48, so a £20 weekly box is worth £86.67 a month, not £80. The same goes for “every four weeks”: that is 13 visits a year, not 12.
What is annual recurring revenue (ARR)?
Annual recurring revenue (ARR) is the yearly value of the recurring charges your current customers pay, excluding VAT and one-off fees. The formula is ARR = MRR × 12. The gym in our examples below has MRR of £13,650, so its ARR is £13,650 × 12 = £163,800.
Businesses that sell annual or multi-year contracts sometimes work it out directly: each contract’s value divided by its length in years, added up. A three-year contract worth £9,000 contributes £3,000 to ARR, not £9,000. If the price steps up each year, use the current year’s amount, and leave out any one-off set-up fee. ARR is not defined by accounting standards such as UK GAAP (generally accepted accounting practice) or IFRS (International Financial Reporting Standards), so businesses calculate it slightly differently; say how you worked yours out when you quote it.
Think of ARR as a snapshot of the next twelve months if nothing changed. It ignores customers you have not won yet and ones who will leave. That makes it useful for comparing one month with another, and for describing the size of a subscription business in a single number, but it is not a forecast and it is not the revenue figure in your accounts.
How to calculate MRR and ARR, step by step
- List every active customer on a recurring plan at the end of the month, including anyone on an annual plan.
- Take what each one actually pays now, after any discount, and excluding VAT.
- Convert each charge to a monthly figure using the table above.
- Leave out anything that does not recur: joining fees, one-off jobs, trials and intro offers.
- Add them up. That total is your MRR.
- Multiply by 12. That is your ARR.
What counts towards MRR and ARR, and what doesn’t
| Item | Treatment | Why |
|---|---|---|
| Subscription, membership and plan fees | Counts | The core of MRR. |
| Recurring add-ons and extra users | Counts | Part of what the customer pays every month. |
| Delivery charges built into a recurring price | Counts | If they recur with every delivery. |
| Annual and multi-year contracts | Counts, spread out | Annual ÷ 12 for MRR; contract value ÷ years for ARR. |
| Discounted prices | Counts at the discounted amount | Use what the customer pays now, not the list price. |
| Paused or frozen accounts | Counts at what they pay while paused | Often £0, sometimes a small holding fee. |
| Usage-based or variable charges | Usually left out | Include only a committed minimum; extra usage varies too much to call recurring. |
| Joining, set-up and one-off fees | Left out | They happen once. |
| Repairs, call-outs and pay-as-you-go work | Left out | However regular it feels, it is not contracted. |
| Free trials and intro offers | Left out until they convert | A trial is not a subscription yet. |
| VAT | Left out | If you are VAT-registered, the VAT you charge belongs to HMRC (HM Revenue & Customs). |
| Deposits | Left out | A tenancy deposit is held for the tenant, not earned. |
Everyday examples of MRR and ARR
Recurring revenue is not only for software companies. Any business with customers who pay on a regular cycle has an MRR. Here is how it works out for seven familiar businesses. All figures are illustrative, and prices exclude VAT where it applies. Residential rent is exempt from VAT, and most food, including veg boxes, is zero-rated.
A local gym
340 members pay £35 a month and 60 pay £350 a year up front. Monthly members bring in 340 × £35 = £11,900. Annual members count as one-twelfth of £350 each month: 60 × £350 ÷ 12 = £1,750. MRR is £13,650 and ARR £163,800. The £25 joining fee, personal-training sessions and café sales are not recurring, so they stay out.
A veg box delivery scheme
250 households take a £20 weekly box, including delivery. Weekly to monthly is × 52 ÷ 12, so each household is worth £86.67 a month. MRR is £21,667 and ARR £260,000, which is the same as 250 × £20 × 52. Holiday pauses reduce MRR while they last; one-off extras and gift boxes do not count.
A boiler maintenance plan
A heating engineer has 180 customers on a £12-a-month cover plan and 120 on a £90-a-year service plan that renews automatically. That is 180 × £12 = £2,160 plus 120 × £90 ÷ 12 = £900. MRR is £3,060 and ARR £36,720. Call-out repairs and new boiler installations may be the bigger earners, but they are not contracted, so they are not recurring revenue.
A small landlord
Three houses let at £950, £1,100 and £1,250 a month give MRR of £3,300 and ARR of £39,600. Tenancy deposits are not income: they are held for the tenant. And ARR shows clearly why it is a snapshot: if the £1,100 house stands empty for a month between tenants, the year brings in £38,500, not £39,600.
A window-cleaning round
120 houses are cleaned every four weeks at £15 a time. Every four weeks means 13 cleans a year, so each house is worth £15 × 13 ÷ 12 = £16.25 a month. MRR is £1,950 and ARR £23,400. One-off conservatory and gutter cleans are extra, not recurring.
A yoga studio
The studio from our unit economics case study has four tiers: £40, £55, £75 and £95 a month. With 300 members spread 90 / 60 / 90 / 60 across them, MRR is £19,350 (an average of £64.50 a member, sometimes called ARPU: average revenue per user) and ARR £232,200. Starters on the “30 days for £30” intro offer are not in MRR until they become members, and class packs and workshops are one-off sales.
A software app for plumbing firms
The accounting app from the same case study ended the month with 455 customers paying an average of about £28.60 each, including add-on modules. MRR is £13,022 and ARR £156,264. The next section shows how it got there.
| Business | Customers | MRR | ARR |
|---|---|---|---|
| Local gym | 400 members | £13,650 | £163,800 |
| Veg box delivery | 250 households | £21,667 | £260,000 |
| Boiler maintenance plan | 300 customers | £3,060 | £36,720 |
| Small landlord | 3 rented homes | £3,300 | £39,600 |
| Window-cleaning round | 120 houses | £1,950 | £23,400 |
| Yoga studio | 300 members | £19,350 | £232,200 |
| Plumbing app | 455 customers | £13,022 | £156,264 |
MRR movements: new, expansion, contraction, churn and reactivation
MRR changes for five reasons. Tracking them separately tells you far more than the total does, because a business can add plenty of new customers and still shrink if more are leaving by the back door.
| Movement | What happened | MRR |
|---|---|---|
| Starting MRR | 440 customers at the start of the month | £12,320 |
| + New MRR | 24 new customers × £25 | +£600 |
| + Expansion MRR | Existing customers adding modules and extra users | +£450 |
| + Reactivation MRR | 2 former customers came back at £25 | +£50 |
| − Contraction MRR | Existing customers downgrading | −£90 |
| − Churned MRR | 11 customers cancelled (2.5%), averaging £28 | −£308 |
| = Ending MRR | 455 customers | £13,022 |
Add the gains and subtract the losses and you get net new MRR: £600 + £450 + £50 − £90 − £308 = £702, growth of 5.7% in a month. A few ratios fall out of the same numbers:
- Customer churn: 11 of 440 customers left, 2.5%.
- Gross revenue churn: cancellations plus downgrades, (£308 + £90) ÷ £12,320 = 3.2%.
- Net revenue retention (NRR), one month: what existing customers alone are worth a month later, (£12,320 + £450 − £90 − £308) ÷ £12,320 = 100.4%. Above 100% means the existing base grew before counting new customers. NRR is usually quoted over 12 months, so do not compare this monthly figure with annual benchmarks.
- Quick ratio: MRR gained ÷ MRR lost, (£600 + £450 + £50) ÷ (£90 + £308) = 2.8. Above 1 means MRR is growing; the higher it is, the less of each month’s new business goes on replacing what you lost.
Each pound of net new MRR adds £12 to ARR, so this one month moved ARR from £147,840 to £156,264. For what those customers are worth over their whole time with you, see our guide to unit economics: customer acquisition cost (CAC), lifetime value (LTV), churn and return on ad spend (ROAS).
A business can win plenty of new customers and still shrink.
ARR vs revenue, run rate, bookings, deferred revenue and annual contract value (ACV)
These terms get used interchangeably, and they shouldn’t be. They measure different things:
| Term | What it is | What it tells you | Example |
|---|---|---|---|
| ARR | Recurring charges from current customers, × 12 | A snapshot of subscription income if nothing changed | Landlord: £3,300 × 12 = £39,600 |
| Revenue | Income earned in a period, as your accounts record it | What actually happened, including one-offs and empty months | Landlord with one empty month: £38,500 |
| Run rate | Any period’s total income scaled up to a year | A quick projection, one-off sales and all | A £30,000 quarter × 4 = £120,000 |
| Bookings | The value of contracts signed in a period | Sales activity, including contracts not started yet | A three-year £9,000 contract = £9,000 booked, £3,000 of ARR |
| Deferred revenue | Cash received for service not yet delivered | A liability on the balance sheet until you deliver | £350 gym year paid in January: £320.83 still owed after one month |
| ACV | Annual contract value: one customer’s contract per year | The size of a typical deal | Annual boiler service: £90 |
The gap between cash and revenue matters most for small businesses. When a gym member pays £350 for a year in January, the gym has the cash, but under accrual accounting it has earned only one-twelfth of it by the end of the month. The rest is deferred revenue: service still owed. Limited companies must account this way. Since April 2024, sole traders and most partnerships work out their taxable profit on the cash basis by default unless they opt out, so for tax the £350 counts when it arrives; the deferred revenue view is still the right way to think about what you owe customers.
Committed MRR: what you know is coming
Committed monthly recurring revenue (CMRR) adjusts MRR for changes you already know about: contracts signed that start next month, and customers who have given notice to leave. For the plumbing app, 3 firms have signed up to start next month (+£75) and 4 have given notice (−£112), so CMRR is £13,022 + £75 − £112 = £12,985. It is a better guide to next month than MRR alone, and it is especially useful in businesses with notice periods, such as gyms, studios and lettings.
Why ARR and MRR matter to a small business
- Planning and cash. MRR is the income you can reasonably expect before the month starts, which makes it the natural basis for budgets, hiring and stock decisions.
- Spotting trouble early. A rising churn line in the monthly bridge shows up weeks before it appears in your accounts.
- Pricing decisions. A premium tier or an add-on shows up directly as expansion MRR. Moving customers to discounted annual plans brings cash in early but lowers MRR, because a year for ten months’ price is worth less each month.
- Selling or raising money. Buyers and investors in subscription businesses often talk in multiples of ARR. The multiple depends heavily on growth, churn and profit margins, and many small businesses are valued on profit instead, so treat any rule-of-thumb multiple you read with caution.
How to track ARR and MRR
Many subscription billing tools report MRR for you, because they already know who pays what and how often. Accounting software reports revenue, which is a different number, so many small businesses keep MRR in a simple spreadsheet: one row per customer with their plan, billing cycle, monthly value and start and end dates. Add a column for the type of each change in the month (new, expansion, contraction, churn or reactivation) and the monthly bridge builds itself.
Once you have MRR, the next questions are what each customer costs to win and what they are worth over their lifetime. Our unit economics guide works through both, with the same plumbing app and yoga studio.
Frequently asked questions
What is the formula for ARR?
ARR = MRR × 12, where MRR is the monthly value of every active subscription, excluding one-off fees and VAT. For multi-year contracts, divide each contract’s total value by its length in years and add them up.
What is the difference between ARR and MRR?
They measure the same thing over different periods. MRR is the recurring income for one month; ARR is the same figure for a year (MRR × 12). Small and fast-changing businesses usually watch MRR; businesses with annual contracts often talk in ARR.
Does ARR include one-off fees?
No. Joining fees, set-up charges, one-off jobs and trials are left out because they do not recur. Only charges customers are committed to paying on a regular cycle count.
What is the difference between ARR and revenue?
ARR is a snapshot of recurring income if nothing changed. Revenue is what your accounts record for a period, including one-off sales and after any cancellations or empty months. A landlord with £3,300 of monthly rent has ARR of £39,600, but one empty month cuts the year’s revenue to £38,500.
How do you calculate MRR from weekly or annual billing?
Weekly prices × 52 ÷ 12; every-four-weeks prices × 13 ÷ 12; quarterly ÷ 3; annual ÷ 12. A £20 weekly box is £86.67 a month, not £80.
Is ARR calculated before or after VAT?
Excluding VAT. If you are VAT-registered, use your prices before VAT is added, because the VAT you charge is collected for HMRC (HM Revenue & Customs). If you are not VAT-registered, use the price you charge.
What does ARR stand for in business?
Annual recurring revenue: the yearly value of a business’s subscriptions and contracts. In accounting exams ARR means accounting (or average) rate of return, a way of judging an investment.
What is the meaning of run rate?
Run rate takes the income from a short period and scales it up to a year, for example one quarter × 4. Unlike ARR, it includes one-off sales, so a busy quarter can flatter it.
Should a small business track ARR or MRR?
Most small businesses get more from MRR, tracked monthly with its movements (new, expansion, contraction, churn and reactivation). ARR is handy as a headline figure for lenders, buyers or investors.
What is a good ARR multiple?
There is no single answer. Multiples of ARR used to value subscription businesses vary widely with growth, churn, margins and size, and many small businesses are valued on profit instead. Take advice before relying on any rule of thumb.
All examples use illustrative figures, not industry benchmarks, and every number in the article and graphics comes from the same model. This article is general information, not financial, accounting or tax advice.