Annual Recurring Revenue (ARR)

Definition
Annual recurring revenue is the revenue a subscription business expects to receive each year from its recurring contracts.

Why it matters

Recurring revenue is worth more than one-off revenue of the same size, because it is more predictable. That is why investors and buyers value a subscription company as a multiple of its ARR (see ARR multiple). For the owner, it also makes planning possible. Hiring, spending and cash needs can be set against income that is mostly already contracted.

A single ARR number can hide a lot. A business adding new customers fast while losing old ones can show healthy growth and still be weakening underneath.

How to apply it

Track ARR as a bridge from one period to the next:

  • Start with the ARR at the beginning of the period.
  • Add new customers and expansion from existing ones.
  • Subtract downgrades and cancellations.
  • The result is the ARR at the end.

Report the movements as well as the total, so growth from new sales is not confused with growth from existing customers.

What it is

ARR counts only revenue that repeats. For a subscription business with monthly plans, it is monthly recurring revenue multiplied by twelve. With annual contracts, it is the yearly value of each active contract added together. One-off income, such as set-up fees or a consulting project, stays out.

For example, 120 customers paying €250 a month give an MRR of €30,000 and an ARR of €360,000. ARR is a measure of commitment, not cash received and not recognised revenue, so it will not match the accounts exactly.

Common mistakes

  • Counting one-off projects, setup fees or paid pilots as recurring.
  • Annualising a single strong month of usage-based revenue.
  • Including contracts that are signed but not yet live, which belongs in committed MRR.
  • Counting free trials or heavily discounted promotions at full price.
Worked example

Suppose a SaaS company has 120 customers, each paying €250 a month through Chargebee, which holds every subscription's recurring amount. Monthly recurring revenue is €30,000, so ARR is €360,000. Over one quarter, five new customers join at €250 a month, twelve existing customers upgrade by a combined €1,500 a month, and eight customers cancel, removing €2,000 a month. In this example, the ARR bridge runs from €360,000 to €369,000, with new customers adding €15,000, upgrades adding €18,000 and cancellations removing €24,000. Reporting those three movements separately shows that cancellations take a large share of the new business, which a single total would hide.

Tools in the example

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  1. Article

    Net Revenue Retention (NRR)

    ARR change from existing customers alone.

  2. Article

    Churn rate

    The share of customers or revenue lost.

  3. Article

    Expansion Revenue

    Extra ARR from customers already paying.

  4. Article

    Annual Contract Value (ACV)

    The yearly value of one contract.

Where it shows up

  • Measuring what works and following data to make better decisions. It tells you which changes are worth keeping and which to drop.
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