Annual recurring revenue is the headline number that investors, board members, and operators use to size a subscription business. It compresses a complex stream of monthly charges into one annualized figure that makes year-over-year comparison and forecasting straightforward. For Shopify subscription stores, ARR is usually calculated from MRR; for enterprise SaaS, it is often calculated directly from annual contract values.
How ARR is calculated
- Simple version — MRR × 12. If you currently bill $50,000 per month in recurring subscriptions, your ARR is $600,000.
- Contract-based version — sum of all active annual contracts, plus annualized monthly contracts. More common in SaaS than in subscription commerce.
- What to include — only recurring subscription revenue. One-time purchases, add-ons billed once, and shipping fees are excluded.
- What to exclude — paused subscriptions (depending on your definition), failed payments still in dunning, and trial subscriptions.
Why ARR matters for subscription operators
Three reasons. First, it is the forward-looking baseline: if no new customers signed up and no one cancelled, this is the revenue you would generate in the next 12 months. Second, it is the metric investors price the business on — subscription companies are typically valued at multiples of ARR. Third, it normalizes seasonality: monthly revenue swings, ARR moves more slowly and shows the underlying trend.
ARR vs. revenue
ARR is the contracted run-rate. Actual recognized revenue may differ — accounting recognizes revenue as it is delivered, not when it is contracted. For a subscription store, this gap is usually small; for prepaid annual contracts, it is larger. See annual recurring revenue vs revenue for the distinction and annual recurring revenue formula for the math.