Definition
Annual Recurring Revenue, often called ARR, is a metric used by subscription-based and SaaS businesses to measure predictable revenue on a yearly basis. It represents the value of recurring subscriptions normalised over a 12-month period, making it easier to track growth and forecast long-term performance.
For example, if a company has 1,000 customers each paying 100 dollars per month, its ARR is 1.2 million dollars.
Advanced
ARR is closely related to Monthly Recurring Revenue (MRR) but provides a broader, annualised perspective. It includes recurring charges such as subscriptions and add-ons but excludes one-time fees or variable usage charges. Finance and product teams often rely on ARR to measure scalability and investor readiness.
Advanced applications include segmenting ARR by customer type, region, or product line, identifying revenue expansion from upsells, and tracking contraction from churn or downgrades. ARR is also used alongside metrics such as ACV, CLV, and CAC to evaluate the efficiency and sustainability of a business model.
Why it matters
- Provides a clear picture of predictable revenue.
- Simplifies financial forecasting and goal setting.
- Helps track business growth and performance over time.
- Offers a benchmark for investors evaluating SaaS businesses.
Use cases
- Forecasting long-term subscription revenue.
- Segmenting customer groups to compare ARR performance.
- Measuring upsell and cross-sell impact on growth.
- Tracking churn effect on yearly recurring revenue.
Metrics
- Net new ARR from new customer contracts.
- Expansion ARR from upsells and cross-sells.
- Churn ARR from lost customers or downgrades.
- Net ARR growth rate over defined periods.
Issues
- Can be misleading if non-recurring revenue is included.
- Delayed recognition of churn until renewal periods.
- Over-reliance may hide short-term revenue volatility.
- Difficult to calculate accurately with complex pricing models.
Example
A SaaS platform earns 2 million dollars in ARR from its base subscriptions. After adding 500,000 dollars from upsells and losing 200,000 dollars to churn, its net ARR is 2.3 million dollars, showing sustainable growth.