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.