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What Is ARR (Annual Recurring Revenue)?

ARR (Annual Recurring Revenue) is the annualized value of a company's active subscription contracts, representing the predictable revenue a SaaS business expects to earn each year. ARR is the standard top-line metric for subscription businesses and the primary number investors use to assess company size and growth rate.

How to Calculate ARR

For companies billing annually, ARR is the sum of all active annual contract values. For companies billing monthly, ARR equals MRR (Monthly Recurring Revenue) multiplied by 12.

ARR = MRR × 12

ARR includes only recurring subscription revenue. One-time fees (setup, implementation, professional services) are excluded because they're not predictable or repeating. Usage-based revenue is typically excluded unless it's contractually committed.

The Components of ARR Growth

ARR changes come from four sources:

New ARR — revenue from newly acquired customers
Expansion ARR — revenue growth from existing customers upgrading or adding seats
Contraction ARR — revenue lost from downgrades
Churned ARR — revenue lost from cancelled accounts

The relationship between these components determines NRR and GRR. Healthy SaaS companies grow ARR through a combination of new customer acquisition and expansion within the existing base.

Why ARR Is the Standard SaaS Metric

ARR became the default growth metric for SaaS because it captures the recurring nature of the business model. Traditional revenue metrics (quarterly revenue, bookings) don't distinguish between one-time and recurring sources. ARR does.

SaaS companies are typically valued as a multiple of ARR. Early-stage companies growing quickly might trade at 10-20x ARR. Mature, profitable SaaS businesses typically trade at 5-10x ARR. This makes ARR growth directly relevant to company valuation and fundraising.