In business, bookings refer to the total value of customer contracts over a certain period. This metric shows sales activity and what commitments customers have made to the business, whether they’re for one-time projects, subscriptions, or multiyear agreements. Bookings help gauge sales momentum and future revenue potential, but they don’t always translate directly into immediate revenue. For example, a major deal that is signed today might bring in money over several years, rather than translating to immediate cash flow.

Annualized run rate (ARR) estimates future annual revenue based on financial data from a recent, shorter time period. While bookings reflect how much new business a company has secured, ARR reflects total income and gauges the company’s overall financial health and stability.

Below, we’ll explain the differences between bookings and ARR and how to use each strategically.

What’s in this article?

• Different types of bookings
  
• How to calculate ARR
  
• How ARR is used to measure performance
  
• Bookings vs. ARR
  
• How bookings translate into ARR
  
• How to use bookings and ARR metrics strategically
  

Different types of bookings

Bookings can fall into several different types, depending on the nature of the revenue and the timing of the contract. These booking types include the following:

• New bookings: These are agreements or contracts with new customers who are signing up for a product or service for the first time. New bookings represent fresh business and drive growth. They include the total value of the new contract, whether it’s a one-time sale, subscription-based service, or a combination of both.

• Renewal bookings: These bookings come from existing customers who renew their contracts or subscriptions. Renewals are an important indicator of customer satisfaction and retention. They show the continuation of revenue from the existing customer base, often at the same value or even higher if upselling occurs. Renewal bookings help gauge the stickiness of a product or service and the effectiveness of customer success teams.

• Expansion bookings (upselling or cross-selling bookings): These are additional sales to existing customers, such as upgrades of their current plans (upselling) and purchases of additional products or services (cross-selling). Expansion bookings are valuable because they come from customers who already trust the company, which makes the sales process smoother and often more cost-effective.

• Nonrecurring bookings: These are one-time sales or contracts that do not provide recurring revenue. Examples include one-time setup fees, customization fees, or nonrecurring professional services. Nonrecurring bookings can boost revenue in the short term but don’t provide the predictability or stability of recurring revenue streams.

How to calculate ARR

To calculate ARR, choose a recent period (e.g., a month, a quarter) for which you have reliable revenue data. Then, multiply the revenue from that period by the number of those periods in a year. If you’re using monthly revenue, you multiply the revenue amount by 12. If you’re using quarterly revenue, you multiply it by four.

Formula: ARR = Revenue in Period × Number of Periods in a Year

Example: ARR = Q1 revenue of $30,000 x 4 = $120,000

How ARR is used to measure performance

ARR is a powerful tool for tracking a business’s growth or decline. If a business’s ARR is rising steadily, that means its revenue is increasing. This increase could result from bringing in new customers, retaining current customers, or selling more to current customers. A declining ARR can be a warning sign that the business is losing customers and needs to improve its retention efforts.

Here’s how ARR can help businesses:

• ARR offers a quick assessment of a business’s financial health at a specific point in time by projecting current revenue over a full year.

• Businesses can use ARR to better predict future financial outcomes based on their current performance. This can make forecasting more accurate.

• ARR helps compare the current period’s performance against that of past periods. This helps businesses that have implemented new strategies or launched new products and want to quantify how these changes have contributed to revenue growth or decline.

• ARR helps identify trends in the business cycle. This is especially useful in industries that experience fluctuations in sales.

• ARR helps communicate financial performance to investors and analysts in easily digestible terms. It provides a normalized rate of revenue that can be compared year over year.

• Businesses can use ARR to make informed decisions about where to allocate resources, when to cut costs, and how to capitalize on emerging opportunities.

While ARR can be a powerful tool for measuring performance, it’s limited because it assumes uniform future performance. This means it can’t account for seasonal fluctuations or changing market dynamics. ARR also doesn’t differentiate between revenue types (e.g., one-time sales, recurring revenue), which can conceal underlying issues in revenue generation tactics.

Bookings vs. ARR

Bookings and ARR are both important metrics, especially for companies with subscription-based models such as software-as-a-service (SaaS) businesses. But they serve different purposes and offer different kinds of insight into a company’s financial health and operational dynamics. Here’s how they differ.

Bookings

Bookings refer to the total value of customer contracts for services or products over a specific period. It’s a forward-looking metric that captures the commitments customers make at the time of signing and all potential revenue, regardless of when that revenue will actually be recognized or when services or products will be delivered.

Businesses often use bookings to gauge sales effectiveness and market demand since bookings reflect the sales team’s ability to secure customer commitments. Compared to ARR, bookings can be more volatile and dependent on sales cycles and customer acquisition efforts in a certain period. Due to their forward-looking nature, bookings can help with long-term financial and capacity planning.

ARR

ARR shows potential yearly earnings based on recent performance in a shorter period (e.g., month, a quarter). It assumes the current revenue performance continues unchanged over the full year. Unlike bookings, ARR concerns revenue that’s being realized already or is very likely to be realized soon under current conditions.

ARR helps businesses assess their current operational performance and can be useful for quick financial assessments and comparisons over time. Compared to bookings, ARR tends to be more stable and continuous, particularly for recurring revenue models. ARR is better suited for short-term financial planning and resource allocation based on current revenue trends.

How bookings translate into ARR

Bookings and ARR are connected, but they don’t convert directly. Bookings project future revenue, while ARR shows what revenue would look like if current conditions persist, including the gradual recognition of those bookings. The relationship between bookings and ARR changes constantly and needs regular updates to reflect new bookings, cancellations, renewals, and financial recognition patterns.

Here’s how bookings impact ARR.

Revenue recognition

Recognizing revenue from a large booking immediately (as in a one-time sale) can inflate ARR. For example, if a business signs a $24,000 contract and recognizes it immediately, ARR derived from that month’s earnings will assume an additional $24,000 in monthly revenue.

If a company recognizes revenue over time (as with a subscription or long-term service), only a portion of the overall deferred revenue will contribute to ARR. For instance, if a company recognizes a $24,000 contract over a 12-month period, ARR derived from the earnings of one of those months will assume an additional $2,000 in monthly revenue.

Contract duration

Short-term contracts contribute to ARR more quickly since revenue recognition occurs over a shorter period. For example, a full six-month contract that’s recognized monthly would contribute to ARR that’s calculated with revenue from half the year.

Long-term contracts contribute to ARR more slowly since only a portion of the booking value contributes to ARR, depending on how revenue recognition is scheduled.

Expansion revenue

If a customer increases their engagement (i.e., buying more products or upgrading services), this expansion adds to ARR when it’s recalculated. ARR calculated prior to the expansion would not account for it.

Practical example

A SaaS company secures a booking worth $60,000 for a one-year subscription that’s billed quarterly for $15,000. Here’s how that affects ARR:

• Q1: The company recognizes $15,000 in Q1. When it calculates ARR based on Q1 revenue, the final ARR figure accounts for the full contract.

• Q2: If the customer decides in Q2 that they want to upgrade to a subscription that’s $20,000 per quarter, the ARR calculated from Q1 revenue would not account for this increase. The upgrade would contribute to ARR only when the company recalculates ARR based on the revenue of Q2 or a later period.

How to use bookings and ARR metrics strategically

Businesses should look at both bookings and ARR for a comprehensive view of their financial health, from immediate cash flow to future revenue potential. By reviewing both metrics regularly, businesses can understand their financial positions, make balanced financial decisions, and adapt their tactics to respond to new challenges or opportunities.

For example, if bookings are high but ARR growth is stagnant, the business might need to investigate issues in customer retention or billing practices. If bookings and ARR are both declining, the business might benefit from improving customer support, adding more value to core offerings, or adjusting pricing tactics to retain existing customers and attract new ones.

Here’s how to use each metric strategically.

How to use bookings

• Prepare for future business: Bookings show potential income from signed contracts. Use this data to make key decisions, including whether to expand your facilities, hire more staff, or increase production to meet expected demand.

• Adjust your strategy: Analyze which products or services are being booked most frequently to identify trends and customer preferences. Use this information to make important decisions, including whether to adjust your inventory levels, guide product development, or customize your marketing tactics to emphasize your most popular offerings.

• Track customer retention: Track how often new bookings convert into recurring revenue to refine your sales and customer management tactics. Focus on turning first-time buyers into repeat customers through loyalty programs, exceptional service, or subscription offers.

• Manage your team: Use booking data to set sales targets. This helps you better forecast revenue and align your sales team’s efforts with company goals.

How to use ARR

• Check financial health: Monitor your ARR regularly for a reliable measure of your business’s financial stability. If you notice ARR trending downward, identify the source (e.g., customer dissatisfaction, product issue) and address any issues proactively.

• Plan for funding: Provide investors and stakeholders with regular updates on your ARR to demonstrate transparency and boost confidence in your business. Time your funding rounds to coincide with periods when your ARR is strong for a better bargaining position and potentially more favorable investment terms.

• Decide where to invest: Invest in areas that impact your ARR positively. These could be customer service improvements, product enhancements, or entry into new markets.