Annual Recurring Revenue (ARR)

What is Annual Recurring Revenue (ARR)?

Annual Recurring Revenue (ARR) is the normalized yearly value of recurring subscription revenue. It represents the predictable, recurring revenue a company expects to receive from customers over a one-year period.

ARR is one of the most important metrics for SaaS and subscription businesses because it shows the baseline revenue you can count on, excluding one-time fees and variable charges.

How to Calculate ARR

ARR Formula:

ARR = (Monthly Recurring Revenue) × 12

Or for annual contracts:

ARR = Sum of all annual subscription values

Example:

If your MRR is $100,000:

ARR = $100,000 × 12 = $1,200,000

ARR vs. MRR

MRR (Monthly Recurring Revenue): Best for companies with monthly contracts or high customer velocity. Provides more granular, real-time insights.

ARR (Annual Recurring Revenue): Best for companies with annual contracts or enterprise customers. Used for long-term planning and investor reporting.

Components of ARR

• New ARR: Revenue from new customers
• Expansion ARR: Revenue from upsells/upgrades
• Contraction ARR: Revenue lost from downgrades
• Churned ARR: Revenue lost from cancellations

Net New ARR = New ARR + Expansion ARR - Contraction ARR - Churned ARR

What NOT to Include in ARR

• One-time implementation fees
• Professional services revenue
• Usage-based variable fees
• Pending or unsigned contracts