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.
A worked example
Heading
Let's consider a real-world example of a subscription-based business that wants to calculate and understand its ARR at a specific point in time.
The business has the following active contracts at the end of the quarter:
30 customers on a monthly plan at $200 per month
20 customers on an annual plan at $1,800 per year
10 customers on an enterprise plan at $500 per month
Calculate the annualized value of each group:
Monthly plan customers: 30 x $200 x 12 = $72,000
Annual plan customers: 20 x $1,800 = $36,000
Enterprise customers: 10 x $500 x 12 = $60,000
Total ARR = $72,000 + $36,000 + $60,000 = $168,000
If the business adds 5 new enterprise customers the following month, ARR increases by:
Additional ARR = 5 x $500 x 12 = $30,000
New ARR = $168,000 + $30,000 = $198,000
This ARR figure is what investors and management use to track revenue trajectory, project future cash flows, and benchmark the business against industry valuation multiples. It also feeds directly into runway calculations and fundraising conversations.