What is ARR?
Annual Recurring Revenue (ARR) is the revenue that an organization expects to receive from customers for its products or services. It is a key metric used by SaaS businesses or businesses that have term subscription agreements. In essence, ARR is a metric of predictable and recurring revenue generated within a year.
The ARR per customer varies as it accounts for their pricing plans, billing periods, etc., as well as the contract with the product/service provider.
ARR for a business
This is the amount of money a company brings in from all its subscriptions and customers on an annualized basis. It takes into account the subscription revenue, upgrades and add-ons, downgrades, and churn or cancellations across customers.
This combined ARR reflects a company’s top-line revenue and is a key metric for measuring year-over-year growth.
See also: Monthly Recurring Revenue (MRR)
Why ARR matters
- At a customer level: Knowing the ARR of a customer can help you decide the level of onboarding support (in terms of time, effort, and resources) to provide a customer.
- At the business level: SaaS businesses use ARR and MRR as their main revenue metric. ARR and Monthly Recurring Revenue (MRR), allow businesses to forecast cash flow in the short and long term.
- Organizations can use ARR as a metric to determine the success of sales and marketing efforts while helping them plan new offerings and customer acquisition strategies.
- To use ARR as a metric for your customers, you should ideally have term agreements with most customers in multiples of one year (if your customers can cancel at any time or if they pay month-to-month, use MRR.)
- There are no concrete rules to decide what to include in ARR. Typically, it includes contractually fixed subscription fees and excludes any one-time fee. Whatever your approach, be consistent in its calculation and communication within your organization.