Annual Recurring Revenue: What is ARR & How to Calculate It
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How To calculate ARR
Divide the total contract value by the number of relative years. For example, if a customer signs a four-year contract for $4000, divide $4000 (contract cost) by four (number of years) for an ARR of $1000/year. If a customer declines to renew a $6000 contract over two years, divide $6000 (contract cost) by two (number of years) for an ARR decrease of $3000.
ARR only includes fixed contract fees, not one time charges. Rather, single charges (or, variable revenue) should be accounted for separately. If any extra, non-subscription charges are lumped into ARR, accuracy is lost in your calculations.
Billing cycles don’t affect ARR, as long as the term of the subscription is a year or more and is recorded the same regardless of how payments are structured.
ARR vs MRR
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