What is Annual Recurring Revenue (ARR)?

Annual Recurring Revenue (ARR) is a core financial metric for subscription-based businesses, representing the predictable, recurring revenue a company expects to earn on an annualized basis from its active contracts or subscriptions.

How ARR is Calculated

  • Includes recurring subscription fees and maintenance charges.

  • Excludes one-time payments, professional services, or usage-based fees.

Formula:

ARR = (Monthly Recurring Revenue) × 12

Example

A SaaS company generates $100,000 in monthly recurring revenue (MRR). ARR = $100,000 × 12 = $1,200,000

Why It’s Important

  • A clear indicator of business health and scalability.

  • Helps in forecasting and valuation, especially for investors and stakeholders.

  • Allows benchmarking against industry standards.