Annual Recurring Revenue (ARR)
QUICK ANSWER
Annual Recurring Revenue is the total predictable, recurring revenue a business expects to generate from its active subscriptions or contracts over a 12-month period. It is one of the most important metrics for SaaS and subscription-based businesses, giving a clear picture of revenue stability and growth trajectory.
In depth
ARR is calculated by multiplying Monthly Recurring Revenue (MRR) by 12, or by summing the annual value of all active subscription contracts. It excludes one-time fees, professional services, and non-recurring revenue to keep the metric focused on sustainable, repeatable income. ARR is closely watched by investors because it signals the health and predictability of a business — a growing ARR indicates strong customer retention and acquisition.
ARR also feeds into other key metrics like net dollar retention, churn rate, and customer lifetime value, making it a foundational number for any subscription business's financial planning.
Example
Let's consider a real-world example of a subscription business calculating its ARR.30 customers at $200/month = $72,000/year
20 customers at $1,800/year = $36,000/year
10 customers at $500/month = $60,000/yearTotal ARR = $72,000 + $36,000 + $60,000 = $168,000This is the predictable annual revenue the business can count on from its existing contracts.