Annual recurring revenue
What is Annual Recurring Revenue (ARR)?
Annual recurring revenue, or ARR, is a key momentum metric used to measure year-over-year growth for subscription-based businesses, such as SaaS companies and recurring eCommerce brands. It reflects the total income generated from recurring sales over a full calendar year. ARR is particularly useful for understanding the long-term financial performance of businesses offering contracts of 12 months or more. It helps assess how stable and predictable a company’s income stream is over time.
How does ARR differ from MRR?
ARR is the annualised version of MRR (monthly recurring revenue). While MRR shows growth on a monthly basis, ARR helps forecast revenue over a longer time frame. Both metrics are important for evaluating the profitability and sustainability of a subscription business. MRR is better suited for businesses with short-term contracts or monthly billing cycles, whereas ARR is more relevant when dealing with annual commitments. To get a full picture of performance, both should be tracked together.
How do you calculate ARR for your subscription business?
There are several ways to calculate ARR, depending on your revenue model. The most straightforward method is to multiply your MRR by 12. For businesses with significant seasonal variation, it may be more accurate to multiply your quarterly recurring revenue by four. This helps account for revenue fluctuations that occur during busier or quieter periods throughout the year.
Understanding your ARR allows you to:
ARR is not just a financial figure, it is a strategic tool that helps businesses stay focused on building consistent, recurring revenue streams for long-term success.
