ARR (Annual Recurring Revenue)

ARR, or Annual Recurring Revenue, is a key financial metric used by subscription-based businesses to measure the predictable, recurring revenue they generate on an annual basis. It provides a clear view of the company’s financial health over a longer period, making it an essential tool for forecasting and planning.

What is ARR?

ARR represents the total revenue a company expects to earn from its subscription services over a year, based on the current monthly recurring revenue (MRR). Like MRR, it excludes one-time payments or non-recurring charges and focuses only on the revenue that repeats annually.

How to Calculate ARR

Formula for ARR:

ARR = MRR × 12

Types of ARR

• New ARR: Revenue gained from new customers who subscribe during the year.
• Expansion ARR: Additional revenue from existing customers who upgrade their subscriptions or purchase additional services.
• Churned ARR: Revenue lost due to customers canceling or downgrading their subscriptions.
• Net New ARR: The total change in ARR over the year, calculated as New ARR + Expansion ARR – Churned ARR.

Why ARR Matters

• Long-Term Revenue Forecasting: ARR provides a clear picture of a company’s recurring revenue stream over the year, helping in long-term financial planning and forecasting. ARR smooths out the seasonal fluctuations that can affect MRR, providing a more stable and long-term view of the company’s revenue.
• Growth Indicator: Tracking ARR over time helps businesses measure growth and make informed decisions about scaling operations, investing in new products, or entering new markets.
• Investor Appeal: Investors and stakeholders often use ARR to evaluate the financial stability and potential growth of subscription-based businesses. A higher or steadily increasing ARR indicates a healthy, growing business with reliable revenue.

ARR vs. MRR

• MRR (Monthly Recurring Revenue): Focuses on the revenue generated each month from recurring subscriptions.
• ARR (Annual Recurring Revenue): Aggregates this recurring revenue over the entire year, providing a longer-term view. While MRR is useful for short-term tracking and monthly performance, ARR is better for annual financial planning and strategic decision-making.