Glossary
ARR (annual recurring revenue)
ARR (annual recurring revenue) is the yearly value of the subscription revenue a company expects to keep receiving from its current customers. It excludes one-time fees such as setup or services, and it's the headline growth metric for subscription and SaaS businesses.
What Is ARR (Annual Recurring Revenue)?
In short You calculate ARR from active contracts at a point in time: the annual value of every recurring subscription, adjusted for upgrades, downgrades and cancellations.
A customer on a $2,000 monthly plan contributes $24,000 of ARR. One-time charges such as implementation fees don't count.
There's no single standard formula. Stripe uses MRR x 12 as the shortcut and recommends ARR for subscriptions with at least a 12-month commitment; Salesforce adds annual subscriptions and other ongoing revenue and subtracts cancellations. Check what a company counts before comparing its ARR with anyone else's, and don't confuse ARR with total revenue or annual run rate, which include non-recurring income.
ARR Example
ARR = MRR x 12
Ending ARR = starting ARR + new ARR + expansion ARR - churned ARR - contraction ARRExample: a company starts the year at $1.2 million ARR. During the year it adds $500,000 from new customers and $150,000 from upgrades, and loses $100,000 to churn and $50,000 to downgrades. Ending ARR is $1.2M + $0.5M + $0.15M - $0.1M - $0.05M = $1.7 million, 42% growth.
ARR in Practice
For sales teams, ARR is how deals are sized and quotas set in subscription businesses. An AE's quota is usually stated in new ARR, and expansion deals count as added ARR. Outbound teams use average ARR per customer to work out how many meetings they need: a $12,000 average contract needs four times as many deals as a $48,000 one.
FAQ
How do you calculate ARR?
For monthly subscriptions, multiply MRR by 12. For a full view, add the annual value of all active subscriptions and other ongoing revenue, then subtract cancellations. Leave out one-time fees.
What is the difference between ARR and MRR?
The period. Stripe puts it simply: the only difference is year versus month. ARR suits annual contracts and planning; MRR suits monthly plans and month-to-month tracking.
Is ARR the same as revenue?
No. ARR counts only recurring subscription revenue at a point in time. Total revenue also includes one-time fees, services and other non-recurring income.
What does ARR exclude?
One-time charges such as setup, implementation, training and consulting fees. Salesforce and Stripe both count only recurring revenue, so anything a customer pays once stays out.
The new Ken opens to the waiting list in batches.
Related
Sources
| Source | Checked |
|---|---|
| Stripe: ARR, a key metric for business performance | |
| Salesforce: What Is Annual Recurring Revenue (ARR)? |
Changelog
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