What is ARR (Annual Recurring Revenue)?
The annualized value of recurring subscription revenue. The primary metric for measuring and valuing subscription businesses.
Key Takeaways
- •ARR = MRR × 12 (or sum of annualized subscription values)
- •Excludes one-time fees, professional services, and variable usage
- •The key metric for SaaS valuation (typically valued at multiple of ARR)
- •Track Net New ARR, Churn ARR, and Expansion ARR separately
ARR Definition
Annual Recurring Revenue (ARR) is the yearly value of recurring subscription revenue from customers. It represents what you would earn over the next 12 months if you retained all current customers with no growth, churn, or changes.
ARR Formula
or: Sum of all active annual subscription values
What to Include (and Exclude)
Include in ARR
- Monthly subscriptions (annualized)
- Annual subscriptions
- Multi-year contracts (annual value)
- Committed usage minimums
Exclude from ARR
- One-time setup/implementation fees
- Professional services
- Variable usage above commitment
- Hardware sales
ARR vs. MRR
MRR (Monthly Recurring Revenue) is the monthly equivalent of ARR. They measure the same thing at different time scales.
| Metric | Best For | Calculation |
|---|---|---|
| MRR | Month-to-month tracking, operational decisions | Sum of monthly subscription values |
| ARR | Valuation, annual planning, investor reporting | MRR × 12 |
When to Use Each
Use MRR for operational tracking—it's more responsive to changes. Use ARR for valuation, board presentations, and annual planning. Investors typically discuss valuation in terms of ARR multiples.
ARR Movement Components
Track how ARR changes month-to-month to understand business health:
New ARR
ARR from brand new customers acquired during the period.
Expansion ARR
Additional ARR from existing customers—upgrades, additional seats, higher usage tiers.
Contraction ARR
ARR lost from existing customers who downgrade but don't fully churn.
Churned ARR
ARR lost from customers who cancel entirely.
ARR Waterfall
Beginning ARR: $1,000,000
+ New ARR: $150,000
+ Expansion ARR: $80,000
- Contraction ARR: ($20,000)
- Churned ARR: ($60,000)
Ending ARR: $1,150,000
Net New ARR: $150,000 (15% growth)
ARR and SaaS Valuation
SaaS companies are typically valued as a multiple of ARR. The multiple depends on growth rate, retention, margins, and market conditions.
| Growth Rate | Typical Multiple | Example |
|---|---|---|
| <20% (slow growth) | 2-4x ARR | $5M ARR = $10-20M value |
| 20-50% (healthy) | 4-8x ARR | $5M ARR = $20-40M value |
| 50-100% (strong) | 8-15x ARR | $5M ARR = $40-75M value |
| >100% (hyper-growth) | 15-30x+ ARR | $5M ARR = $75-150M+ value |
Multiples Fluctuate
These multiples vary significantly with market conditions. 2021 saw multiples of 40-100x for high-growth companies; 2023 saw compression to 5-15x for similar metrics. Always compare to current market comps.
Related SaaS Metrics
Net Revenue Retention (NRR)
Revenue from existing customers after expansion and churn. >100% means expansion exceeds churn.
Gross Revenue Retention (GRR)
Revenue retained from existing customers (max 100%). Measures pure retention without expansion.
ARPA (Average Revenue Per Account)
ARR divided by number of customers. Tracks whether you're moving upmarket or down.
LTV:CAC Ratio
Customer lifetime value vs. acquisition cost. Shows unit economics health.
Frequently Asked Questions
What's the difference between ARR and revenue?
ARR represents the annualized value of recurring subscription contracts—what you'd earn if nothing changed for 12 months. Revenue is what you actually recognize in a period under accounting rules. ARR excludes one-time fees (implementation, setup) and may differ from recognized revenue due to timing of contract starts and renewals.
Should I include monthly contracts in ARR?
Yes. Annualize monthly subscription revenue by multiplying MRR by 12. However, note that monthly contracts have higher churn risk than annual contracts, so investors may discount heavily-monthly ARR or ask for separate reporting. The best ARR mixes include significant annual or multi-year contracts.
How do I handle usage-based pricing in ARR?
This is tricky. Some companies exclude variable usage from ARR entirely. Others include committed minimums only. Still others estimate based on historical usage patterns. Be consistent and disclose your methodology. Investors will ask questions about usage-based components.
What ARR growth rate do investors expect?
The 'Triple Triple Double Double Double' framework suggests: 3x growth to $2M ARR, 3x to $6M, then 2x growth for three years ($12M, $24M, $48M). In practice, 50%+ growth is 'good,' 100%+ is excellent at early stages. Growth rate expectations decline as ARR increases.
Related Terms & Resources
LTV:CAC Ratio
Unit economics explained
Burn Rate
Cash spend vs. ARR growth
CFO for Fundraising
Present metrics to investors
Fractional CFO Guide
Financial leadership for growth
Need Help with SaaS Metrics?
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