ARR (Annual Recurring Revenue)

What is ARR?

Annual Recurring Revenue (ARR) is the lifeblood metric for subscription businesses. It represents the total value of your recurring revenue contracts normalized to a one-year period. Think of it as your business's predictable revenue engine - the foundation everything else is built on.

ARR isn't just MRR multiplied by 12, though that's often how you calculate it. It's a statement about the sustainability of your business model. When investors ask about your ARR, they're really asking: "How much predictable revenue can you count on next year?"

Why ARR Matters

ARR is the North Star metric for SaaS companies because it strips away the noise. One-time payments, professional services, setup fees - none of that counts. ARR focuses purely on the recurring, predictable portion of your revenue stream.

Investors watch ARR growth rates religiously. Companies growing ARR at 100%+ year-over-year command premium valuations. The Rule of 40 (ARR growth rate + profit margin should equal 40%+ is a common benchmark for healthy SaaS businesses.

How to Calculate ARR

The simple formula is: ARR = MRR × 12. But let's get more precise.

For monthly subscriptions, multiply your MRR by 12. For annual contracts, sum up all annual contract values. For multi-year deals, take the total contract value divided by the number of years.

Here's where founders mess up: including non-recurring revenue. That big implementation fee? Not ARR. Professional services? Not ARR. Only the recurring subscription component counts.

ARR Growth Benchmarks

Seed Stage: 100-300% year-over-year
Series A: 100-200% YoY
Series B: 80-150% YoY
Series C+: 50-100% YoY

How to Accelerate ARR

There are three levers: acquire more customers, expand existing customers, reduce churn. Most founders over-index on new acquisition and ignore expansion and retention.

Build expansion revenue into your product from day one through usage-based pricing, feature tiers, and seat expansion.

Common Mistakes

Don't confuse ARR with total revenue. Track Net New ARR by component: New ARR, Expansion ARR, Contraction ARR, and Churned ARR. Don't game the metric with prepayments.

If your SaaS company has $50,000 in MRR, your ARR would be:

ARR = $50,000 × 12 = $600,000

If you have 100 customers each paying $500/month, your ARR is still $600,000 ($50,000 MRR × 12).