ARR (Annual Recurring Revenue) is the yearly recurring subscription revenue a business expects, based on current MRR. The formula is MRR × 12. Like MRR it excludes one-time fees, and it breaks into new, expansion, churned, and net-new ARR — the headline metric investors use to value SaaS.
What is ARR?
ARR, or Annual Recurring Revenue, 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.
ARR provides a clear view of the company’s financial health over a longer period, making it an essential tool for forecasting and planning.
How to Calculate ARR
Formula for ARR
ARR = MRR × 12Annualized recurring revenue
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.
ARR FAQ
How do you calculate ARR?
Multiply monthly recurring revenue by 12: ARR = MRR × 12. $10,000 MRR = $120,000 ARR. Only recurring subscription revenue counts — exclude one-time fees.
What's the difference between ARR and MRR?
Both track recurring revenue; MRR is monthly, ARR is annual. MRR suits month-to-month operational tracking; ARR suits long-term planning and is the standard for enterprise SaaS valuation.
What are the types of ARR?
New ARR (new customers), expansion ARR (upgrades), churned ARR (cancellations/downgrades), and net new ARR (New + Expansion − Churned).
Why do investors focus on ARR?
It's a stable, predictable measure of recurring revenue and growth — a steadily rising ARR signals a healthy, scalable subscription business, which drives valuation.
