What is ARR (annual recurring revenue)?
ARR is an acronym for annual recurring revenue, a momentum metric that calculates the total income generated from subscription sales over a one-year period. It is a key performance indicator for subscription businesses, including SaaS businesses and other subscription model companies. ARR is often thought of as a valuation metric, and frequently referenced by companies with minimum term subscriptions of one year or more.
What’s the difference between ARR and MRR?
ARR is the annual equivalent of monthly recurring revenue (MRR). In other words, while ARR measures annual revenue growth, MRR measures monthly revenue growth. Both metrics are important for assessing the health of subscription businesses.
Though there are several ways recurring revenue businesses can calculate ARR, often, the simplest way to calculate this metric is to annualize your monthly recurring revenue, or multiply your MRR by 12. For some businesses whose revenue varies more from month to month depending on the season, it may be more helpful to calculate ARR by multiplying their quarterly recurring revenue by four.
Why your subscription business should track annual recurring revenue
Tracking annual recurring revenue is key for measuring growth and assessing profitability for subscription business model companies. Tracking and analyzing ARR data can provide key insights into your customers’ needs and preferences, helping you pivot your offerings to meet them where they are and increase brand loyalty, average order value, and lifetime value.