ARR (Annual Recurring Revenue)
Annual Recurring Revenue (ARR) is the annualized value of active subscription contracts, representing the predictable revenue a SaaS or subscription business expects to receive over the next 12 months. ARR is calculated by summing all active recurring subscription values, normalized to an annual amount — a customer paying $5,000/month contributes $60,000 to ARR. It excludes one-time fees, professional services, and usage overages. ARR is the primary valuation metric for SaaS businesses and the foundation for calculating growth rates, retention metrics, and sales efficiency ratios.
Key Details
- Formula: ARR = sum of all active annual subscription values; for monthly contracts, multiply MRR by 12
- ARR components: beginning ARR + new business ARR + expansion ARR - contraction ARR - churned ARR = ending ARR
- Net new ARR (new + expansion - contraction - churn) is the most watched SaaS growth indicator and the basis for revenue forecasting
- ARR must reconcile against billing system records — discrepancies between CRM-reported ARR and actual billed amounts indicate data quality issues
- Deferred revenue and ARR are related but different: ARR is a forward-looking metric; deferred revenue is an accounting liability on the balance sheet
- ARR per employee and ARR growth rate are key efficiency metrics used by investors to benchmark SaaS companies against peers
- Reconciliation use case: monthly ARR bridge reconciliation verifies that reported ARR movements (new, expansion, churn) match underlying contract changes