What is Annual Recurring Revenue?
Annual Recurring Revenue (ARR) is the sum of all subscription revenue expressed as an annual value. For most companies, ARR is the sum of all new business subscriptions and upgrades (sometimes called expansion), minus downgrades (or contractions) and cancelled subscriptions. Though not a Generally Accepted Accounting Principle (GAAP) value, it's the Revenue equivalent used by every SaaS company. ARR is used interchangeably with Monthly Recurring Revenue (MRR).
How to calculate Annual Recurring Revenue
ƒ Sum(Recurring Revenue irrespective of billing interval expressed as an annual value)
If a customer subscribes to a service with a 1-year renewal agreement for $12,000, then Annual Recurring Revenue would be;
ARR = $12,000
If a customer subscribes to a service for $10,000 (with no contract), then Annual Recurring Revenue would be;
ARR = $0
If a customer subscribes to a service with a monthly renewal agreement for $1,000 per month, then Annual Recurring Revenue would be;
ARR = $1,000 * 12 = $12,000
More about this metric
Annual Recurring Revenue (ARR) is a company’s measure of predictable and recurring revenue generated for the life of a subscription averaged over the period of a year. It is typically used by subscription-based businesses.
Tracking trends in ARR gives a good overview of the general health of your business, indicating where revenue is increasing or decreasing. ARR is an accurate way to monitor the changes in the business as it relates to new or lost subscriptions, renewals, upgrades or downgrades.
ARR is useful in forecasting revenue from potential customers because it is a stable measure and is expected to continue in the future, allowing leadership to manage expenses and resources. Longer term contracts, where churn has been proven to be less than with shorter term subscriptions, are particularly attractive to investors as they signal future financial stability.
ARR is measured using only committed subscriptions or recurring fees. Variable or one time fees are not included in this calculation.
In addition to tracking ARR, Lifetime Value of a subscription customer is key as well. Lifetime Value does not limit the revenue to a single month or year, but rather calculates a theoretical lifetime revenue value for a customer, based on known churn rates.
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