What Is Contracted Annual Recurring Revenue (CARR)?

In subscription-based business models, precise financial planning and accurate forecasting are vital. For CFOs, financial planning and analysis (FP&A) teams, and other business decision-makers, metrics, like contracted annual recurring revenue (CARR), provide critical insights into predictable future income.

Unlike other revenue metrics, CARR focuses on revenue commitments, including active subscriptions and newly signed contracts that will generate income soon. By leveraging CARR, businesses can assess their financial outlook, ensure alignment with long-term goals, and confidently communicate performance to investors and stakeholders.

What Is Contracted Annual Recurring Revenue (CARR)?

Contracted annual recurring revenue (CARR) represents the total value of all recurring customer contracts over 12 months, including agreements that have yet to generate revenue. It offers a forward-looking measure of financial health, helping businesses forecast more effectively and identify opportunities to grow recurring revenue streams.

CARR is a cornerstone metric for SaaS and subscription-based businesses, reflecting the contracted commitments that drive predictable revenues. Unlike metrics that only capture revenue generated today, CARR includes future revenue streams, providing a comprehensive view of the company’s financial trajectory.

By integrating CARR into financial planning, businesses gain a powerful tool to align operational decisions with revenue goals, ensuring long-term growth and stability. 

How To Calculate CARR

Calculating contracted annual recurring revenue (CARR) involves summing up recurring revenues from active contracts and newly signed agreements. Adjustments can be made to account for anticipated customer behavior, such as renewals, upgrades, or downgrades. The CARR formula is:

CARR = Active Subscription Revenues + New Contract Bookings (+ Adjustments for Renewals or Upgrades)

Explanation of Components:

• Active Subscription Revenues: Revenue generated from current subscriptions already in service.
• New Contract Bookings: Revenue value from newly signed contracts, even if services haven’t yet started.
• Adjustments for Renewals or Upgrades: Predicted revenue changes due to customer retention or subscription tier changes.

Example: A SaaS company with $500,000 in active subscriptions and $200,000 in new contracts scheduled to start in the next quarter would calculate its CARR as:

CARR = $500,000 (Active Subscriptions) + $200,000 (New Bookings) = $700,000

By excluding non-recurring revenues like one-time fees, this formula ensures CARR focuses only on predictable, recurring income.

CARR vs. ARR

While contracted annual recurring revenue (CARR) and annual recurring revenue (ARR) both assess recurring income, their focus differs.

• CARR: Captures all contracted revenue, including future commitments not yet active, making it a forward-looking metric.
• ARR: Focuses exclusively on active subscriptions currently generating revenue, reflecting the present financial state.

Consider a SaaS company with $800,000 in ARR from active subscriptions. If the company signs $300,000 in new contracts scheduled to start in six months, its CARR would rise to $1,100,000.

The distinction between ARR and CARR allows CFOs and FP&A teams to balance an analysis of current performance with insights into future financial potential.

How Other KPIs Affect Your ARR and CARR

Renewals and Renewal Rates

Renewal rates significantly influence both ARR and CARR, as they ensure that revenues from existing customers are retained for the next period. High renewal rates signal strong customer satisfaction and generate steady, predictable revenue streams.

For instance, if a company’s CARR includes $1 million in contracted revenues and consistently achieves a 90% renewal rate, it can reliably project the retaining of $900,000 of revenue in future periods. Strategies to improve renewal rates include offering multi-year agreements, enhancing customer support, and proactively addressing client needs.

Customer Churn

Customer churn — measuring the rate at which customers end their contracts — negatively impacts CARR by reducing the total value of recurring revenues. Beyond lost revenues, churn also increases overall customer acquisition costs (CAC), as businesses must acquire new customers to replace those lost.

To mitigate churn, companies can:

• Focus on Customer Experience: Provide seamless onboarding and proactive support to build loyalty.
• Enhance Value Propositions: Regularly update offerings to meet customer needs and differentiate from competitors.
• Implement Retention Programs: Use incentives or exclusive benefits to retain high-value customers.

Monitoring churn closely allows businesses to safeguard their contracted revenues and maintain financial stability. 

Plan Downgrades & Upgrades

Customer behavior regarding plan changes — whether upgrades or downgrades — affects CARR by altering the total value of contracted commitments.

• Upgrades: Customers moving to higher-tier plans increase the overall CARR, reflecting greater revenue potential.
• Downgrades: Customers shifting to lower-cost plans reduce recurring revenues, impacting long-term growth.

Using data analytics and customer segmentation, companies can anticipate these changes and offer personalized solutions to encourage upgrades or prevent downgrades.

Additional Considerations

Multiple Product Offerings

For companies with diverse product portfolios, segmenting CARR by product line can provide detailed insights. This approach helps identify high-performing services, optimize resources, and target specific growth areas.

Contract Length

Encouraging longer-term contracts enhances revenue predictability and stability. Incentives like discounted rates for multi-year agreements can boost CARR while fostering stronger customer relationships.

Geographic Expansion

For businesses operating across multiple regions, factors like currency exchange rates and local economic conditions may influence CARR. Standardizing calculations ensures consistency when reporting global revenue metrics.

Contracted annual recurring revenue (CARR) is a key metric for SaaS and mid-market companies aiming to align financial performance with strategic growth goals. By capturing both active and future commitments, CARR offers a clear picture of predictable revenues, empowering CFOs and FP&A teams to make data-driven decisions.

Integrating CARR with other KPIs like churn, renewals, and upgrades enables businesses to identify opportunities for growth, address risks proactively, and maintain financial stability. As a result, companies can ensure alignment with both short-term objectives and long-term success.

You can maximize your financial planning potential with Firmbase. Leverage advanced FP&A tools to seamlessly calculate CARR, align your data, and create actionable forecasts that save time and enhance accuracy. Schedule a demo today to learn more and see the platform in action.