What Is ARR?
Annual Recurring Revenue definition, calculation, and how it differs from MRR.
Definition
Annual Recurring Revenue (ARR) is the total annualised value of all active subscription contracts, representing the predictable revenue a subscription business can expect to receive over the next 12 months.
Why it matters
ARR is the primary metric by which SaaS and subscription businesses are valued, funded, and benchmarked. Growing ARR signals the business is adding revenue faster than churn removes it. It is the metric boards and investors track most closely because it captures both the current state of the business and the directional trend. Two companies with the same current revenue look completely different on ARR if one is growing 80 percent annually and the other is flat. ARR makes that difference explicit and immediately comparable.
In practice
A B2B SaaS company starts the year with $480,000 ARR from 40 customers paying $1,000 per month. During Q1, they close 8 new customers and lose 2 to churn. At the end of Q1, they have 46 active customers at $1,000 per month, giving $552,000 ARR. That is 15 percent ARR growth in a single quarter. The CEO presents this figure to the board alongside new ARR added, churned ARR lost, and expansion ARR from existing customers who upgraded their plans.
Frequently asked
What is ARR and how is it calculated?
ARR is the total annualised value of all active subscription contracts. It is calculated by multiplying Monthly Recurring Revenue (MRR) by 12. For example, if a business has 50 customers each paying $500 per month, MRR is $25,000 and ARR is $300,000. ARR only includes predictable, recurring revenue from active subscriptions. One-off fees and variable charges are typically excluded.
What is the difference between ARR and MRR?
>MRR is the total predictable revenue expected each month from all active subscriptions. ARR is MRR multiplied by 12. MRR is the real-time operational metric used to track month-to-month growth and churn. ARR is the strategic headline metric used by boards, investors, and acquirers to assess the scale and growth trajectory of a subscription business.
What is a good ARR growth rate for a SaaS company?
>Pre-Series A startups are often expected to grow 3x year-on-year. Series A companies typically target 2x to 3x. Bootstrapped or profitable SaaS businesses often target 50 to 100 percent annual ARR growth at early stages, moderating to 20 to 40 percent at scale. The T2D3 benchmark (triple, triple, double, double, double) has historically been a venture-grade standard at growth stage.
Does ARR include one-time fees?
>ARR should only include predictable, recurring subscription revenue. One-time implementation fees, professional services, and variable usage charges above a subscription base are typically excluded. Including non-recurring revenue inflates ARR and misrepresents the predictability of the business. Investors and acquirers will normalise for pure ARR when assessing valuation.
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