What Is Annual Recurring Revenue?
ARR is the annualized value of all recurring subscription revenue. It's the primary top-line metric for SaaS companies and investors evaluating subscription businesses.
Definition
Annual Recurring Revenue (ARR) is the normalized yearly value of all active subscription contracts. It's calculated by multiplying Monthly Recurring Revenue by 12 (ARR = MRR × 12), or by summing the annual contract values of all subscriptions. ARR excludes one-time fees, professional services, and non-recurring revenue.
ARR is the primary valuation metric for SaaS companies — public SaaS companies are often valued at a multiple of ARR (e.g., 10x ARR for high-growth companies). It normalizes different billing cycles (monthly, annual, multi-year) into one comparable number.
ARR growth rate, net new ARR (added this quarter), churned ARR (lost), and expansion ARR (upsells) tell the full story of a SaaS business's health. Investors look for companies consistently adding more new ARR than they lose to churn — called ARR accretion.
Real-World Example
A SaaS company has 100 customers paying $1,000/month and 20 customers paying $5,000/month. MRR = (100 × $1,000) + (20 × $5,000) = $200,000. ARR = $200,000 × 12 = $2,400,000. If the company's stock trades at $24M market cap, that's a 10x ARR multiple — typical for early-stage SaaS with strong growth.
Why It Matters
ARR is the single most important metric for evaluating SaaS businesses — it shows the scale and predictability of the revenue base, and its growth rate determines valuation multiples.
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Frequently Asked Questions
What is the difference between ARR and revenue?
ARR is the forward-looking annualized run-rate of current subscriptions. GAAP revenue is the actual cash recognized in a period per accounting rules. A company signing a $120K annual contract today adds $120K to ARR immediately but only recognizes $10K/month in GAAP revenue over the year.
What is a good ARR growth rate for a SaaS startup?
Early-stage SaaS should target 100%+ ARR growth (doubling annually). The benchmark for growth-stage SaaS ($1M-$10M ARR) is 75-100%. Above $10M ARR, 50-75% is excellent. The 'Rule of 40' (growth rate + profit margin > 40%) is a key benchmark for public SaaS companies.
What is the difference between ARR and TCV?
ARR is annualized recurring revenue from current subscriptions. TCV (Total Contract Value) is the total value of a signed contract including all years and one-time fees. A 3-year $150K contract has $150K TCV but only $50K ARR. Investors focus on ARR; sales teams often track both.
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