Annual Recurring Revenue (ARR)

Date created: Apr 28, 2018  •   Last updated: Feb 25, 2022

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).

Alternate names: Annualized Run Rate

Annual Recurring Revenue Formula

ƒ Sum(Recurring Revenue irrespective of billing interval expressed as an annual value)

How to calculate Annual Recurring Revenue

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

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How to visualize Annual Recurring Revenue?

To visualize your Annual Recurring Revenue, you can use a summary chart to display the value and optionally compare it to a previous time period.

Annual Recurring Revenue visualization example

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Annual Recurring Revenue

$183k

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11.26

vs previous period

Summary Chart

Here's an example of how to visualize your current Annual Recurring Revenue data in comparison to a previous time period or date range.
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Annual Recurring Revenue

$182.83k

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11.25

vs previous period

Summary Chart

Here's an example of how to visualize your current Annual Recurring Revenue data in comparison to a previous time period or date range.

More about Annual Recurring Revenue

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.