What is annual recurring revenue (ARR)?
Annual recurring revenue (ARR) is an essential momentum metric for measuring year-over-year growth for SaaS companies and other recurring revenue businesses. ARR calculates the total amount of income generated from recurring sales over a year-long period.
How does ARR differ from MRR?
ARR is the annual equivalent of monthly recurring revenue (MRR), helping predict revenue for the year based on current monthly revenue for your company. These metrics are both crucial to understand the profitability and growth of businesses following a subscription model.
While ARR is important for understanding the growth of subscriptions with contracts of 1 year or longer, MRR is helpful for understanding the success of shorter-term subscriptions with a contract of less than 1 year. Typically, both metrics should be considered to most effectively forecast revenue.
How to calculate ARR for your subscription business
There are a variety of ways to calculate ARR for businesses following a subscription revenue model. Generally, the simplest way to make an ARR calculation is to annualize your monthly recurring revenue, or multiply your MRR by 12.
For some subscription business model companies, revenue may vary greatly from month to month during busier seasons. To account for this, these businesses may prefer to calculate annual recurring revenue by multiplying their quarterly recurring revenue by four.