The ARR formula looks deceptively simple. The math is easy; the discipline of applying it consistently is where most subscription operators slip. Getting ARR right means defining what counts as "recurring," what to do with paused or trial subscribers, and how to handle mid-cycle changes — all of which can swing the number by 5–15%.
The two standard ARR formulas
- MRR-based — ARR = MRR × 12. Best for subscription stores on monthly billing.
- Contract-based — ARR = Σ (annual contract values). Sum all active annual contracts, plus annualized monthly contracts. Common in enterprise SaaS.
What counts as MRR (and therefore ARR)
- Include: all active recurring subscription charges that recur on a known cadence.
- Exclude: one-time purchases, shipping fees, sales tax, add-ons billed once, and refunds.
- Be careful with: annual prepays (divide by 12 and count monthly), pauses (most exclude), and trial subscribers (exclude until paid).
Worked example
A Shopify subscription store has:
- 800 monthly subscribers at $40/month = $32,000 MRR
- 200 quarterly subscribers at $100/quarter = $33.33/month × 200 = $6,667 MRR
- 50 annual prepay subscribers at $400/year = $33.33/month × 50 = $1,667 MRR
- Total MRR = $40,334; ARR = $484,008
The most common ARR formula mistakes
First, including one-time purchases that happen to repeat (a customer buying the same product manually every month is not subscription revenue). Second, double-counting annual prepays (counting both the upfront payment and the monthly-equivalent MRR). Third, ignoring pause status, which inflates ARR when many subscriptions are technically active but not currently charging. See annual recurring revenue for the broader concept and ARR calculation for additional walkthroughs.