ARR is short for Annual Recurring Revenue, a common metric used by SaaS or subscription businesses. Simply, ARR is the value of recurring revenue, normalized to a one year period. ARR excludes one-time and variable payments. It’s the key metric used to track where your business is headed over the next year.
Here’s how we calculate it: ARR = MRR * 12
It is typical for ARR to only be used as a metric for businesses that have annual contracts, since non standard or non contracted agreements can cause heavy fluctuation and inaccuracy.
However, we feel ARR is a vital metric for a business to track, so we developed a proprietary algorithm that normalizes month and term agreements, and accounts for things such as number of days in a month.
ARR is a great indicator of the momentum of your business, specifically when used as part of a cohort analysis:
- ARR from new customers during a certain time period
- ARR from existing customer renewals
- How upgrades and add ons increases in ARR
You can learn more about how to do this type of cohort analysis here.
Since ARR is calculated using MRR, you may find this post helpful: What is MRR?