Annual Recurring Revenue (ARR): Complete Guide

What is Annual Recurring Revenue (ARR)?

Annual Recurring Revenue (ARR) is the value of recurring revenue normalized to a one-year period. It’s the primary metric investors and analysts use to evaluate and compare SaaS businesses, representing the yearly run-rate of subscription revenue.

Why ARR Matters for SaaS Startups

ARR is the gold standard metric for SaaS businesses because it provides a clear view of business scale and growth trajectory. It helps investors understand the size and growth potential of a subscription business, making it easier to compare companies and determine valuations.

For startups, ARR is crucial for fundraising, strategic planning, and setting growth targets. It’s also the foundation for calculating important ratios like ARR growth rate and revenue per employee.

How to Calculate ARR

Basic ARR Formula:

ARR = Monthly Recurring Revenue (MRR) × 12

Example:

Current MRR: $50,000
ARR = $50,000 × 12 = $600,000

ARR for Annual Contracts:

For customers paying annually, simply sum all annual contract values:

Customer A: $12,000/year
Customer B: $24,000/year
Customer C: $6,000/year
Total ARR = $42,000

What to Include in ARR:

All recurring subscription fees
Add-on or upsell recurring revenue
Professional services if they’re ongoing/recurring

What to Exclude:

One-time setup fees
Implementation or consulting fees
Hardware sales
Non-recurring professional services

ARR Growth and Benchmarks

ARR Growth Benchmarks:

$0-$1M ARR: 10-20% month-over-month growth
$1M-$10M ARR: 6-10% month-over-month growth
$10M+ ARR: 3-5% month-over-month growth

ARR Milestones:

$1M ARR: Product-market fit validation
$10M ARR: Significant market traction
$100M ARR: IPO consideration threshold

ARR Growth Strategies:

New Customer Acquisition: Expand sales and marketing efforts
Upselling: Move customers to higher-tier plans
Cross-selling: Add complementary products or modules
Price Increases: Strategic pricing optimization for existing customers
Churn Reduction: Improve retention to protect existing ARR

ARR vs. Revenue:

ARR differs from traditional revenue because it represents the run-rate of recurring revenue, not actual cash received. A customer who pays $120,000 upfront for a yearly contract contributes $120,000 to ARR, even though the cash was received in one payment.