What is annual recurring revenue (ARR)?
Annual recurring revenue (ARR) is a key financial metric used by companies, especially those with an annual subscription-based model. ARR provides you with a measure of the predictable and recurring revenue components of your business. ARR doesn’t include one-time fees or non-recurring services. It’s also different from monthly recurring revenue (MRR), which is the total expected revenue for any given month.
Let’s say you run a SaaS company and you have customers on a variety of different subscription plans. Some customers might pay monthly, others might pay annually, and yet others might have custom three-year plans.
To calculate your ARR, you’d add up all of the revenue you expect from your monthly or annual subscriptions over a year. For multi-year contracts, you’d divide the full contract amount by the number of years in the term to find your annual revenue.
Why is it important? ARR can give you insights into:
- Overall business health: Get a snapshot of the health and growth potential of your business by showcasing your recurring revenue.
- Customer retention rates: ARR is an especially important metric if your business is built on subscription services, as it can show how well you’re retaining customers over time.
- Forecasting: This metric helps you make future business decisions and predict the growth of your business based on predictable sources of income.
- Investor strength: For businesses that are looking for investors, a strong ARR can demonstrate that you have a stable, reliable revenue stream.
By tracking ARR, you can gain valuable insights into your future sales strategy, customer retention efforts, and overall business health.