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Annual Recurring Revenue (ARR)
Definition
Annual Recurring Revenue (ARR) is a metric that measures the predictable annual revenue generated by a company's subscription-based business model.
Explanation
ARR is a critical metric for SaaS and subscription businesses. It normalizes subscription revenue to an annual figure, making it easier to compare growth across periods. ARR is calculated by taking the monthly recurring revenue (MRR) and multiplying by 12.
ARR helps businesses forecast future revenue, value the company, and track growth. It excludes one-time fees and variable revenue. A high and growing ARR signals strong product-market fit and customer retention.
Example
A SaaS company with 500 customers paying $100/month each has an MRR of $50,000 and an ARR of $600,000.