Annual recurring revenue
AN-yoo-ul reh-KUR-ing REV-uh-noo
The annualized value of your active subscription contracts. The heartbeat metric of every SaaS business.
ARR is the annualized value of your subscription contracts. If a customer signs a $10k monthly contract, that is $120k ARR. If they sign a $60k annual contract paid upfront, that is also $60k ARR.
ARR tells you how much recurring revenue you can count on if nothing changes. No new sales. No churn. Just the current base renewing. It is the single most important number in a SaaS business because recurring revenue is worth more than one-time revenue. A customer paying you $100k per year, every year, is more valuable than a customer who pays $100k once and never returns.
Investors, board members, and CFOs use ARR as the baseline for everything: growth rate, valuation multiples, hiring plans. When someone says "we are a $50M ARR company," they are describing the annualized run rate of current subscriptions.
Examples
A startup closes its first enterprise deal.
The customer signs a three-year contract at $300k total. The ACV is $100k. That deal adds $100k to ARR.
A product-led growth company with monthly billing.
You have 1,000 customers paying $99/month. Your MRR is $99,000. Your ARR is $1,188,000.
A sales team reports quarterly results.
The VP of Sales says "We added $2M in net new ARR this quarter." That means the total value of new subscriptions, minus churned subscriptions, grew by $2M on an annualized basis.
In practice
ARR waterfall for board deck
Beginning ARR: $__M + New business: $__M + Expansion: $__M - Contraction: $__M - Churn: $__M = Ending ARR: $__M
Read more on the blog
Frequently asked questions
What is the difference between ARR and revenue?
ARR is the annualized value of active subscriptions right now. Revenue is what you actually earned in a period according to accounting rules. A customer who signs a $120k annual deal in December contributes $120k to ARR immediately, but only $10k of recognized revenue in December.
How is ARR different from bookings?
Bookings measure what you sold (the total contract value when a deal closes). ARR measures the annualized recurring portion. A three-year, $300k deal is $300k in bookings but $100k in ARR.
Related terms
The monthly value of active subscription contracts. ARR divided by 12, or the sum of all monthly subscription fees.
The percentage of revenue retained from existing customers after expansion, contraction, and churn. Above 100% means you grow without new sales.
The rate at which customers cancel or do not renew. Measured as logo churn (customers lost) or revenue churn (dollars lost).
The annualized value of a single customer contract. Tells you about individual deal size, while ASP tells you the average across all deals.
A signed deal. The total value of a customer contract at the time they commit to buy. Not the same as revenue.
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