Two very different approaches for calculating ARR
This type of analysis defines MRR as the amount of revenue recognized within a particular month related to recurring-type services (e.g. subscription services) contracted with a customer in accordance with GAAP principles. That month’s recognized revenue is then multiplied by 12 to calculate the ARR value of the contract.
This approach may also be referred to as “recognized ARR” or “implied ARR.”
Pros: ARR can be calculated based on existing GAAP accounting activities used to recognize revenue each month. This also means that the underlying MRR can be directly tied back to P&L revenue in a given month and may not require additional data tracking.
Cons: ARR can be misstated, swing wildly and inaccurately depict the ongoing value of customer relationships. Month-to-month fluctuations in recognized revenue inhibit analysis of customer subscription trends and distort retention-related metrics. Requires data manipulation to unwind the effects of GAAP revenue recognition to overcome reporting obstacles.
This type of analysis defines MRR as a calculation of the transaction price for any recurring-type services divided by the number of months in the subscription term.
This calculated MRR amount is then multiplied by 12 to derive the ARR value of the customer contract.
This approach may also be referred to as “bookings ARR.”
Pros: ARR is consistent and more accurately represents ongoing customer value. It supports valuable customer subscription trend analysis, precision in retention-related metrics and insightful operational reporting without data manipulation.
Cons: MRR may not directly tie back to P&L revenue, and may require additional data tracking or explanation to close the gap between MRR and recognized revenue in a given month.