ARR vs Revenue – 6 Key Differences (& a bonus)

In short:

• ARR (Annual Recurring Revenue) measures predictable, recurring income a business expects from subscriptions or contracts over a year.
• Revenue is the total money a company earns from all sources, including both recurring and one-time payments, within a given period.
• While ARR is always part of revenue, not all revenue is ARR—ARR focuses on subscriptions, while revenue covers the whole business.

When it comes to understanding a company’s financial performance, two of the most commonly used metrics are ARR (Annual Recurring Revenue) and Revenue. While they may seem similar at first glance, they serve very different purposes—especially for subscription-based and SaaS businesses. In this article, we’ll break down the 6 key differences between ARR and Revenue, helping you grasp when and why each metric matters.

ARR vs. Revenue: In Simple Words

Revenue includes all income sources within a set period, while ARR hones in on the steady, recurring income stream. This focus offers a clearer view of financial consistency and projected growth, essential for assessing a company’s long-term stability.

What is Revenue?

Revenue, also known as sales or turnover, is the total amount of money a company generates from its core business operations during a specific period.

It includes all the income earned from selling goods or services, as well as any other sources of revenue, such as interest, royalties, or fees.

Revenue is a fundamental financial metric that showcases the top-line growth of a business and reflects its ability to generate income.

Revenue can be calculated by multiplying the quantity of goods or services sold by their respective prices. It is important to note that revenue represents the total amount earned before any expenses or deductions, such as taxes or costs of goods sold, are accounted for.

Revenue is often reported on a company’s income statement, which provides a comprehensive overview of its financial performance.

What is ARR?

ARR, or Annual Recurring Revenue, is a metric commonly used by subscription-based businesses to measure their predictable and recurring revenue streams. ARR represents the total annual revenue a company is expected to generate from its subscription-based products or services. It provides insights into the company’s subscription-based business model and its ability to retain customers over an extended period.

ARR is calculated by multiplying the average monthly revenue per customer by twelve. It excludes one-time fees, non-recurring revenue, or any revenue generated from additional services beyond the core subscription. ARR is a useful metric for subscription-based businesses as it helps them forecast future revenue, plan for growth, and evaluate their customer retention strategies.

ARR vs. Revenue: Key differences in details

Importance of revenue and ARR in financial analysis

Both revenue and ARR play a crucial role in financial analysis and decision-making.

Revenue is a vital measure of a company’s financial health and growth potential. It helps investors, analysts, and stakeholders assess the company’s ability to generate income, evaluate its market position, and make informed investment decisions. Revenue trends also provide insights into the company’s sales performance and customer demand.

ARR, on the other hand, is particularly important for subscription-based businesses. It provides a clear picture of their predictable and recurring revenue, which is essential for assessing their long-term viability and profitability. ARR helps businesses identify trends in customer retention, evaluate the effectiveness of their subscription pricing strategies, and make data-driven decisions to drive growth and improve customer satisfaction.

Calculating revenue and ARR

Calculating revenue and ARR requires different approaches and considerations. Revenue is calculated by multiplying the quantity of goods or services sold by their respective prices. It is important to include all sources of income and exclude any deductions or expenses to obtain an accurate revenue figure. Revenue can be calculated for a specific period, such as a month, quarter, or year, depending on the company’s reporting requirements.

The Revenue formula:

Revenue = Sales x Average Price of Service or Sales Price

ARR, on the other hand, is calculated by multiplying the average monthly revenue per customer by twelve. To calculate the average monthly revenue per customer, businesses need to consider the total revenue generated from subscriptions and divide it by the total number of active subscribers. It is crucial to exclude any one-time fees, non-recurring revenue, or additional service revenue to obtain an accurate ARR figure.

The ARR formula:

ARR = (Sum of subscription revenue for the year + recurring revenue from add-ons and upgrades) – revenue lost from cancellations and downgrades that year

Try It Yourself: ARR vs Revenue Calculator

How do you convert ARR to revenue?

To convert ARR to revenue, you typically reverse the annualization process — but here’s the catch: ARR and revenue measure different things, so a direct conversion doesn’t always work perfectly.

Still, here’s the general idea:

Simple Formula (for evenly distributed subscriptions):

Revenue = ARR ÷ 12 (for monthly revenue)
or
Revenue = ARR × (Number of months passed ÷ 12)

Example:
If ARR = $120,000
Then monthly revenue ≈ $10,000
If 3 months have passed, recognized revenue ≈ $30,000

Important Caveats:

1. Only works for recurring revenue — ARR doesn’t include one-time fees, onboarding charges, or usage-based billing.
2. Assumes even revenue recognition — which may not apply if you bill quarterly or upfront.
3. New vs. Existing ARR — If you added new contracts mid-year, the revenue recognized from them would only be partial.

Why is ARR Higher than Revenue?

ARR can be higher than revenue in situations where the business has signed long-term contracts but hasn’t recognized all the revenue yet.

Here’s why:

• ARR (Annual Recurring Revenue) reflects the contracted value of recurring revenue over a full year. It’s forward-looking and assumes the customer will continue paying for the full term.
• Revenue, on the other hand, follows accounting rules like GAAP or IFRS, and only includes the portion of the contract that has been earned or delivered so far.

Example:

Imagine a SaaS company signs a 12-month contract worth $120,000 on January 1st.

• ARR = $120,000 (shows the full annualized value)
• January Revenue = $10,000 (only 1/12 of the contract is recognized)

So early in the year, ARR will look much higher than revenue.

Is ARR recognized revenue?

No, ARR is not recognized revenue. ARR, or Annual Recurring Revenue, is a forward-looking metric that represents the expected yearly income from active recurring subscriptions. It’s used primarily for forecasting and tracking growth in subscription-based businesses.

Recognized revenue, on the other hand, refers to the portion of revenue that has been earned and delivered, following accounting standards like GAAP or IFRS.

While ARR gives a snapshot of the business’s recurring revenue potential, recognized revenue is what actually appears on the income statement. So, even if a company signs a $12,000 annual contract today, only a portion of it—say $1,000 per month—will be recognized as revenue over time.

Can ARR be less than revenue?

Yes, ARR can be less than revenue, especially in businesses that earn a significant portion of their income from one-time payments, setup fees, or non-recurring services.

Here’s how that happens:

ARR only includes recurring revenue that’s expected to repeat annually, like subscriptions. It excludes things like:

• One-time onboarding fees
• Hardware or service sales
• Usage-based charges (if not predictable)
• Project-based consulting

So, if your business collects a lot of non-recurring revenue in a given period, your total revenue can exceed ARR.

Example:
You run a SaaS company with $200K in revenue this year — $100K from recurring subscriptions and $100K from one-time setup fees.

• Your ARR = $100K
• Your Revenue = $200K

In this case, ARR is lower than revenue because it doesn’t count the one-time income.

ARR vs Recurring Revenue

ARR (Annual Recurring Revenue) and recurring revenue are closely related but not identical. Recurring revenue refers to the actual income a business earns on a regular basis—monthly, quarterly, or annually—from subscription-based or contract services.

ARR, on the other hand, is a standardized, annualized snapshot of that recurring revenue, used primarily for forecasting and valuation. It projects what a business would earn in a full year from its current subscriptions, assuming no changes.

So while recurring revenue reflects what’s coming in right now, ARR represents the expected yearly total based on those active subscriptions.

Conclusion

Understanding the differences between ARR vs Revenue is essential for conducting comprehensive financial analysis and making informed business decisions. Revenue represents the total income generated from a company’s core business operations, while ARR specifically focuses on the annual recurring revenue from subscription-based products or services.

Both metrics provide valuable insights into a company’s financial performance, growth potential, and customer retention strategies.

By accurately calculating and analyzing revenue and ARR, businesses can gain a better understanding of their financial health and make data-driven decisions to drive growth and profitability.

Read more:

• Revenue vs Sales Enablement: 7 Key Differences
• What Is Unbilled Revenue And How To Account For It
• How to Calculate ARR (Annual Recurring Revenue)
• What is Total Revenue and How to Calculate Total Revenue
• Difference Between Cash Flow Statement And Cash Budget