Annual Recurring Revenue (ARR)
Annual recurring revenue (ARR) is a financial metric that shows the amount of money that comes in each year for the life of a contract. It’s the annualized version of monthly recurring revenue (MRR) and is commonly used by businesses that operate with subscription models for their products and services.
While there are no strict rules about what constitutes ARR, it typically only includes fixed subscriptions and recurring fees. For example, if a customer purchased a non-refundable two-year subscription for $10,000, the ARR would be $5,000 per annum for that customer.
ARR is an important metric because it is helpful for illustrating the overall health of a subscription-model business. Since ARR is the amount of revenue that a company expects to bring in, it makes for more accurate future growth measurements and revenue forecasting, which is important for businesses that want to attract new investors. It’s also useful for measuring new sales, renewals, upgrades, and tracking lost customers.
Annual Recurring Revenue Explained:
Annual Recurring Revenue (ARR) FAQs
What is Annual Recurring Revenue?
Annual recurring revenue is a metric used predominately by subscription-based businesses to measure the total amount of expected revenue from customers on an annual basis. It includes recurring subscription fees but excludes one-time charges and non-recurring revenue.
How is ARR calculated?
ARR is calculated by taking the monthly recurring revenue (MRR) and multiplying it by the period of that revenue. For example, if a customer purchased a non-refundable two-year subscription for $10,000, the ARR would be $5,000 per annum for that customer.
Why is it important to measure ARR?
ARR provides a clear picture of the company’s recurring revenue stream, helps in forecasting future revenue, and is a key indicator of business health and growth potential. It also aids in evaluating the effectiveness of sales and retention strategies.