Subscription businesses often wrestle with picking the best revenue metric to understand their financial health and growth. CARR and ARR both track recurring revenue, but they highlight different aspects of a company’s performance.
CARR scoops up future contracted revenue and expected churn, while ARR only looks at current active subscriptions. So, CARR is more forward-looking, and ARR is just a snapshot of what’s happening now.
That difference matters when it comes to making big decisions about growth, cash flow, or talking to investors. It’s not always obvious which one is more useful until you see what you’re trying to solve.
Fast-growing subscription companies, in particular, need both metrics. CARR tells the story of committed future revenue, while ARR highlights current stability and predictable cash flow.
Key Takeaways
- CARR includes signed contracts and future commitments; ARR only counts active paying customers.
- CARR helps with forecasting for growth, while ARR gives a reliable view of current revenue.
- Most successful subscription businesses track both for a full financial picture.
Defining CARR and ARR
CARR covers committed future revenue from signed contracts. ARR, meanwhile, measures only current active subscriptions.
Both metrics help track revenue, but CARR gives a forward-looking view, including contracted future sales.
What Is CARR?
Committed Annual Recurring Revenue (CARR) captures all revenue that’s been committed or contracted for a subscription business. That means current subscription revenue plus future revenue from signed contracts.
CARR includes revenue customers have agreed to pay, even if their subscription hasn’t started yet. If someone signs up in January but starts in March, that revenue already bumps up CARR.
It also factors in expected changes—subtracting churn and downgrades, adding projected upsells or new subscriptions.
Key CARR components:
- Current subscription revenue
- Signed future contracts
- Expected upsells and expansions
- Minus expected churn and downgrades
CARR works best for fast-growing businesses that want to measure sales momentum and future revenue potential.
What Is ARR?
Annual Recurring Revenue (ARR) measures total revenue from active subscriptions and contracts expected in the next 12 months. ARR only pulls in revenue from customers who are actively paying.
This metric focuses on existing customers and their renewal patterns. If a customer has an active subscription renewing within 12 months, that value adds to ARR.
ARR ignores one-time fees and setup costs. Only recurring subscription revenue matters here.
ARR calculation example:
- Annual subscription at $250 = $250 ARR
- Two-year contract at $400 = $200 annual ARR
- Monthly subscription at $50 = $600 ARR
ARR offers stability for financial planning because it’s all about predictable revenue from the current customer base.
CARR vs ARR Overview
Timing and scope set these two apart. ARR covers current active subscriptions. CARR pulls in future contracted revenue that hasn’t started yet.
Key differences:
| Metric | Includes New Contracts | Includes Active Subscriptions | Forward-Looking |
|---|---|---|---|
| CARR | Yes | Yes | Yes |
| ARR | No | Yes | Limited |
CARR usually comes out higher than ARR since it includes more revenue sources. Fast-growing subscription businesses often lean on CARR for investor pitches and tracking growth.
ARR is more conservative, based on proven customer relationships. It’s handy for budgeting and operational planning.
Core Differences Between CARR and ARR
CARR includes future contracted revenue and expected churn. ARR sticks to current active subscriptions.
The timing of revenue recognition and how signed contracts are handled make these metrics pretty distinct.
Revenue Recognition Timing
ARR only counts revenue from subscriptions that are currently active and generating income. It’s a measure of what the business is earning right now.
CARR, on the other hand, goes broader. It includes revenue from contracts that haven’t started yet. If a customer signs a contract to start in three months, CARR includes that future revenue, but ARR doesn’t.
So, ARR gives a snapshot of present financial health. CARR offers a forward-looking view, including committed future income.
Key timing distinctions:
- ARR: Active subscriptions only
- CARR: Active subscriptions plus signed future contracts
- CARR factors in expected churn before it happens
- ARR waits until customers actually cancel
Treatment of Contracted Revenue
ARR doesn’t include revenue from new customers who have signed contracts but haven’t started service. That leads to different numbers for the same business.
Say a company has $100,000 in current subscriptions and $25,000 in signed future contracts:
- ARR: $100,000
- CARR: $125,000 (minus expected churn)
CARR subtracts expected churn from future revenue. ARR only reflects churn after it actually happens.
CARR considers bookings and churn for contracts not yet live. ARR focuses on contracts already generating revenue.
Applicability to Subscription Models
Fast-growing subscription businesses get the most out of CARR. If you’re signing a lot of future contracts, you need to see committed revenue beyond just current subscribers.
ARR is better for established businesses with a stable customer base. It provides reliable numbers for budgeting and planning.
CARR is most useful for:
- High-growth SaaS companies
- Businesses with long sales cycles
- Companies with annual or multi-year contracts
- Startups looking for investment
ARR is most useful for:
- Mature subscription businesses
- Monthly subscription models
- Companies with low churn
- Stable revenue forecasting
Calculation Formulas and Inputs
CARR and ARR each have their own formulas and data needs. CARR includes future contracts and expected changes. ARR only looks at current active subscriptions.
How to Calculate CARR
The basic CARR formula is:
CARR = ARR + Signed Contracts – Expected Churn
For companies with lots of subscription tiers, you can get more detailed:
CARR = ARR + New Subscriptions + Expected Upsells – Expected Downsells – Expected Churn
You’ll need to include revenue from contracts that customers have signed but haven’t started yet. This usually makes CARR higher than ARR if you’ve got a strong sales pipeline.
Expected churn is the revenue loss from customers likely to cancel in the next year. Most businesses estimate this using historical churn rates and customer health scores.
How to Calculate ARR
ARR calculation is straightforward. Just add up the yearly value of all current paying customers.
Annual contracts are simple—if a customer pays $250 per year, that’s $250 ARR.
Multi-year contracts need a little math. A two-year contract worth $400? That’s $200 annual ARR ($400 divided by 2).
Monthly subscriptions get multiplied by 12. So, $50 per month means $600 ARR.
ARR ignores one-time fees like setup costs or professional services. Only recurring subscription revenue counts.
Key Data Inputs
Both metrics need accurate customer data and revenue tracking. You’ll want details like subscription values, contract terms, and payment schedules.
For CARR:
- Signed contracts not yet started
- Expected upsells and cross-sells
- Anticipated downgrades
- Historical churn rates
- Customer health scores
For ARR:
- Active subscription amounts
- Contract lengths and terms
- Recurring payment schedules
- Current customer count
Accurate inputs matter. Forecasting future changes like upsells and churn rates isn’t always easy, but it’s crucial.
Business Relevance of CARR and ARR Metrics
CARR and ARR help businesses track revenue health, attract investors, and plan for growth. Leaders use them to make decisions about spending, hiring, and expansion.
Evaluating Company Health
ARR shows how much money a business makes from customers who pay regularly each year. It’s a quick way to see if the company is growing or shrinking month by month.
CARR includes current paying customers and new contracts that will start later. This gives a clearer picture of what revenue will look like soon.
Key health indicators:
- Monthly growth rates in both metrics
- Gap size between CARR and ARR
- Customer retention patterns
- Revenue predictability
Companies that keep ARR growing show they’re keeping customers happy. A big gap between CARR and ARR could mean implementation delays are slowing down revenue.
Strong numbers in both areas help leaders catch problems early.
Investor Perspectives
Most investors want to see both metrics. CARR points to future growth potential. ARR shows current performance stability.
ARR proves the business is bringing in steady cash flow. CARR helps investors see what growth could look like in the next few quarters.
Investor evaluation factors:
- ARR growth rate consistency
- CARR to ARR conversion rates
- Revenue predictability
- Market expansion potential
For fast-growing subscription businesses, ARR gives more insight than traditional revenue reporting. Investors and leadership teams lean on these metrics to measure real growth.
Companies with higher CARR than ARR usually get better funding deals. That signals to investors that new customers are coming in and the company’s expanding.
CARR and ARR in Financial Planning
Finance teams use both metrics for budgets, hiring, and big purchases. ARR helps predict cash flow for the next year with pretty good accuracy.
CARR shows committed future revenue. That helps businesses plan for growth—maybe hiring new staff or buying equipment before the cash actually lands.
Planning applications:
- Budget forecasting: ARR sets spending limits
- Hiring: CARR growth supports new team members
- Expansion: Both metrics help time market moves
- Investments: Predictable revenue guides big purchases
Understanding how KPIs impact ARR and CARR lets managers improve these numbers and predict when things might shift. It’s a planning advantage that can help companies outpace the competition.
Finance leaders track both metrics monthly. If ARR drops, they can cut costs quickly. If CARR looks strong, they might invest more.
Nuances and Considerations
Several tricky scenarios can impact how businesses calculate and interpret CARR versus ARR. Bookings terminology creates confusion, multi-year contracts need special treatment, and usage-based pricing models add extra challenges for accurate measurement.
Bookings vs Contracted Revenue
A lot of companies mix up bookings and contracted revenue, but they’re not the same thing. Bookings usually cover total contracted ARR from multi-year deals, professional services, and even one-off commitments.
You should only count the recurring revenue part in CARR. Leave out professional service fees, setup charges, and any one-time costs.
This difference actually matters for forecasting accurately. If you toss in non-recurring revenue, you’ll end up with an inflated CARR and skewed growth projections.
Key differences:
- Bookings: Total contract value, including services and one-off fees
- CARR: Strictly recurring subscription revenue contracted for the next year
Multi-Year Agreements Impact
Multi-year contracts make CARR calculations a bit tricky. Only the recurring subscription revenue for the next 12 months should count toward CARR.
If a multi-year contract has rising annual subscription values, you have to stick to the exact terms for each year. So, a three-year deal at $100,000, $105,000, and $110,250 would add just $100,000 to current CARR. Next year, you’d count $105,000.
Some companies lump the whole multi-year deal into CARR, but that just overstates short-term revenue. It’s misleading and throws off your growth numbers.
Usage-Based Pricing Implications
Usage-based pricing models complicate CARR calculations. Only the contracted minimums should count in CARR, no matter how often you bill.
If you don’t have any minimum commitments, you can’t really calculate CARR in any meaningful way. The metric needs guaranteed recurring revenue to be worth anything.
Overage and variable usage revenue are unpredictable. If you include those in CARR, you’re just fooling yourself about future income.
CARR treatment for usage models:
- Count only contracted minimums
- Skip all overage or variable usage revenue
- Pure usage-based companies might not get much out of CARR
Treatment of Churn and Downsell
CARR drops by churned ARR only when the churn actually happens. Don’t subtract known future churn until the contract is officially up.
Same goes for downsell ARR. Reductions kick in when the contract change becomes active, not when you sign or announce it.
Contract renewal dates decide when churn hits CARR. If a customer’s contract ends in December, you take the churn out of December’s CARR—not months earlier just because you knew it was coming.
Selecting the Right Metric for Your SaaS Business
Choosing between CARR and ARR really depends on your business model, who you sell to, and how long your implementation takes. Companies with long sales cycles tend to like CARR’s forward-looking angle, but if you recognize revenue right away, ARR is probably more useful.
When to Use CARR
CARR fits SaaS companies with longer sales and implementation cycles. Mid-market and enterprise companies with bigger annual contracts should probably pay close attention to this metric.
Key indicators for using CARR:
- Contracts over $10,000 a year
- Implementation takes more than a month
- Focus on enterprise or mid-market customers
- Big gap between contract signing and revenue start
If you’re selling to big companies, you’ll often see a delay between when the contract is signed and when you start recognizing revenue. CARR captures that committed revenue before it shows up in your financials.
Implementation delays widen the gap between CARR and ARR. CARR gives you a better sense of momentum, even if your accounting is lagging behind.
When to Use ARR
ARR is better for businesses that recognize revenue the moment a customer signs up. If you’ve got a self-service model and customers can use your product instantly, ARR is the right fit.
Best scenarios for ARR:
- Self-service subscriptions
- Monthly billing
- Minimal setup
- Lots of small customers
Self-service SaaS with low price points and lots of users usually has no delay between signup and revenue. ARR gives you a real-time look at how you’re doing.
If your customers get access right away, you don’t need CARR’s forward-looking approach. ARR just reflects what’s actually happening.
Integrating Both Metrics Into Reporting
A lot of SaaS companies track both metrics for a full picture. CARR and ARR together show you where you stand now and what’s coming up.
Monthly reporting structure:
- ARR for current revenue
- CARR for tracking pipeline conversion
- Analyze the gap between the two
- Assess how implementation delays affect the numbers
Finance teams should really keep an eye on the difference between CARR and ARR each month. If the gap’s growing, it might mean your implementations are taking longer than they should.
Knowing how different KPIs affect ARR and CARR can help you improve both. Customer success impacts current and future revenue.
Frequently Asked Questions
CARR tracks committed future revenue from signed contracts, while ARR only counts what’s currently active. SaaS companies use specific formulas to track these and see how bookings affect their forecasts.
What does CARR stand for in financial terms and how is it different from ARR?
CARR stands for Committed Annual Recurring Revenue. It’s the total recurring revenue a company’s secured through contracts, even if some of it hasn’t started billing yet.
CARR gives you a forward-looking view of revenue by including what’s coming from renewals, upgrades, and expansions over the next year. ARR just looks at what’s active right now.
So, ARR is about current revenue; CARR is about what’s committed for the future.
How is Committed Annual Recurring Revenue (CARR) calculated in a SaaS business model?
To calculate CARR, you need data on your ARR, new bookings, and expected churn. Add up the annualized value of all committed contracts, even if they’re not live yet.
Minimum contract commitments are essential for accurate CARR. The formula is current ARR plus new annual contracts signed but not started.
Track signed deals that will generate revenue down the line. That includes upgrades and renewals customers have already agreed to.
In what ways does Contracted ARR differ from standard ARR?
Contracted ARR includes revenue from contracts that are signed but maybe not billing yet. Standard ARR only counts subscriptions that are active and billing now.
That timing difference really matters for planning. Contracted ARR shows you future revenue from customers who’ve committed, while standard ARR is just a snapshot of today.
What constitutes Bookings in the context of ARR and how are they related?
Bookings are the total contract value customers have committed to, regardless of when you’ll recognize the revenue. They include new deals, renewals, and expansions.
Bookings feed directly into CARR since they represent future committed revenue. When a customer signs an annual contract, that booking bumps up CARR right away.
The link between bookings and ARR comes down to when the contract starts. Bookings become ARR once the subscription is live and billing.
Can you explain the primary differences between CARR and live ARR?
Live ARR is the recurring revenue you’re actually getting from active subscriptions right now. It’s your real cash flow from paying customers.
CARR, on the other hand, factors in anticipated revenue from renewals, upgrades, and expansions over the next year. Live ARR only counts what’s currently active.
Live ARR shifts when customers start or cancel subscriptions. CARR changes when customers sign new contracts or promise to renew—even before those contracts kick in.
What methodologies are commonly used for calculating Annual Recurring Revenue (ARR)?
The standard ARR calculation adds up the annualized value of all active recurring subscriptions.
Companies usually take monthly contracts and multiply them by 12 to get the annual figure.
Most SaaS businesses leave out one-time fees, setup costs, and professional services when figuring out ARR.
They count only predictable recurring subscription revenue for this metric.
ARR focuses on revenue actively generated from current subscriptions. This gives you a snapshot of how things are going right now.
Companies check ARR every month to keep tabs on subscription health and spot growth trends.
