Annual Recurring Revenue (ARR) normalizes subscription revenue to a yearly figure, giving companies and investors a clear picture of financial health. It includes all active subscriptions but excludes one-time fees, professional services, and variable usage charges. ARR is most commonly used by SaaS companies with annual or multi-year contracts. To calculate ARR, sum all active subscription values and normalize to a 12-month period. For example, if you have 100 customers each paying $100/month, your ARR is $120,000. ARR growth rate is one of the most closely watched metrics by SaaS investors and is a key indicator of product-market fit.
Annual Recurring Revenue (ARR)
Annual Recurring Revenue (ARR) - ARR is the annualized value of recurring subscription revenue, used to measure the predictable income of a SaaS business over a year.
What is Annual Recurring Revenue (ARR)?
Examples
- 1
A company with 500 customers on a $200/month plan has an ARR of $1.2M (500 x $200 x 12).
- 2
If a customer upgrades from $100/month to $150/month mid-year, the ARR increases by $600 ($50 x 12).
- 3
ARR excludes one-time implementation fees of $5,000 charged to new customers.
Frequently Asked Questions about Annual Recurring Revenue (ARR)
Annual Recurring Revenue (ARR) is the total amount of predictable, recurring revenue a subscription business expects to earn over a 12-month period.
Annual Recurring Revenue (ARR) normalizes subscription revenue to a yearly figure, giving companies and investors a clear picture of financial health. It includes all active subscriptions but excludes one-time fees, professional services, and variable usage charges.
A company with 500 customers on a $200/month plan has an ARR of $1.2M (500 x $200 x 12).
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