Annual Recurring Revenue (ARR)

What is annual recurring revenue (ARR)?

Annual Recurring Revenue (ARR) is the total value of recurring subscription income that a business expects to earn in a 12-month period. It focuses exclusively on predictable revenue streams, leaving out one-off charges or fluctuating fees, making it a clear indicator of the long-term stability and health of subscription-driven models.

Why ARR matters

• Reliable forecasting: ARR offers a dependable baseline for projecting future revenue, budgeting, and resource planning.
• Retention and growth insight: Tracking ARR over time reveals changes driven by new sales, renewals, and churn, enabling teams to identify and address growth opportunities or risk areas.
• Investor confidence: A consistent ARR stream signals predictable earnings, which is often rewarded with stronger valuations and greater stakeholder trust.

How to calculate ARR

There are several ways to determine ARR, depending on the data available:

1. Summing recurring revenue sources
   Formula: ARR = (Annual subscription revenue + recurring upgrades/add-ons) – revenue lost to cancellations and downgrades.
2. Converting from MRR
   Formula: ARR = MRR × 12
   This approach works when Monthly Recurring Revenue (MRR) reflects only ongoing, predictable revenue.
3. Using contract value and term
   Formula: ARR = Contract value ÷ contract length in years
   Example: A 3-year contract worth $60,000 would have an ARR of $20,000.

Inclusions and exclusions

• Include: Annual subscriptions, recurring upgrades, add-on services, and renewals that occur on a predictable schedule.
• Exclude: One-time onboarding or setup fees, professional services, and non-recurring purchases.
  
  

Related metrics

Key considerations

• Define your scope clearly: Set and maintain consistent rules for what qualifies as recurring revenue.
• Avoid inflating figures: Excluding one-off charges keeps ARR accurate and meaningful.
• Analyze in context: Use ARR alongside churn, upsell, and retention metrics for a complete view of performance.
  

ARR in subscription businesses

For subscription-based companies, ARR is a measure of subscriber base health and the effectiveness of retention and growth strategies. Breaking ARR down into components such as new ARR, expansion ARR, and churned ARR helps pinpoint exactly where gains are coming from and where revenue leakage occurs. This level of insight allows businesses to target retention programs, refine pricing models, and optimize customer success efforts, all of which directly impact sustainable growth.

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