ARR
Annual Recurring Revenue
A recurring revenue metric used in SaaS planning and software purchasing decisions.
Definition
Annual Recurring Revenue (ARR) represents the yearly value of subscription revenue, normalized to a 12-month period. It’s the primary metric for measuring SaaS business growth and is used in valuations, planning, and investor reporting.
How ARR Is Calculated
ARR = Monthly Recurring Revenue (MRR) × 12
Or calculate directly from annual contracts:
ARR = Sum of all active annual subscription values
ARR vs MRR
| Metric | Time Period | Best For |
|---|---|---|
| ARR | Annual | Investor reporting, yearly planning |
| MRR | Monthly | Operational tracking, short-term trends |
Both metrics exclude one-time fees, setup costs, and professional services revenue.
ARR Components
Understanding ARR changes requires tracking:
- New ARR - Revenue from new customers
- Expansion ARR - Upgrades and add-ons from existing customers
- Churned ARR - Lost revenue from cancellations
- Contraction ARR - Downgrades from existing customers
Net New ARR = New + Expansion - Churned - Contraction
Why ARR Matters for Tool Selection
Many SaaS tools price based on company size or ARR:
- Enterprise features often unlock at certain ARR thresholds
- Some tools offer startup programs for companies under $1M ARR
- Pricing negotiations become possible at higher ARR levels
Frequently Asked Questions
What’s the difference between ARR and revenue?
ARR only counts recurring subscription revenue, annualized. Total revenue includes one-time fees, services, and non-recurring income. Investors focus on ARR because it’s predictable and compounds over time.
When should a company start tracking ARR?
Start tracking ARR as soon as you have recurring revenue. Even at small scale, understanding MRR and ARR trends helps with planning. Most analytics and billing tools calculate this automatically.
What ARR growth rate is considered good?
Early-stage SaaS often targets 2-3x annual growth. At scale ($10M+ ARR), 50-100% year-over-year growth is strong. The “Rule of 40” suggests growth rate + profit margin should exceed 40%.