ARR
Annual Recurring Revenue (ARR) is the annualized view of a subscription business's recurring revenue. It's simply MRR × 12, but it's the North Star metric for valuation and for the decisions investors, executives, and boards actually make.
Annual Recurring Revenue (ARR) is the annualized view of a subscription business's recurring revenue. It's simply MRR × 12, but it's the North Star metric for valuation and for the decisions investors, executives, and boards actually make.
Why It Matters
When investors value a SaaS company, ARR is the first number they look at. Bessemer Venture Partners' State of the Cloud report shows top SaaS companies trade at 15–25x ARR, and once ARR crosses $10M, the company gets reclassified as a "proven business." If MRR is a real-time monthly state, ARR is the projection that "this revenue will likely hold for another year." Fundraising, hiring, and org planning all anchor on ARR.
How to Calculate
Basic formula: ARR = MRR × 12
Example: $5,000 MRR → $60,000 ARR
Annual prepay: A customer on a $1,200/year plan contributes $100 MRR and $1,200 ARR. Annual prepayments map directly to ARR.
Exclusions: One-time consulting, setup fees, and event revenue aren't recurring — exclude them. Refunds and credits also come out.
ARR Components
The same breakdown as MRR applies at the annual level:
- New ARR: From new customers
- Expansion ARR: Upgrades and added seats
- Reactivation ARR: Customers who churned and returned
- Churned ARR: Lost to cancellations
- Contraction ARR: Lost to downgrades
Net New ARR = New + Expansion + Reactivation − Churned − Contraction
Key ARR Metrics
ARR growth rate: (This quarter ARR − Same quarter last year ARR) / Same quarter last year ARR × 100. 100%+ YoY signals a "Triple, Triple, Double, Double, Double" trajectory candidate.
NRR (Net Revenue Retention): How much of a cohort's ARR survives a year later. 120%+ means existing customers alone drive growth.
Rule of 40: ARR growth rate + operating margin ≥ 40. The health check for mature SaaS, balancing growth and profitability.
CAC Payback: How many months of ARR to recover CAC. 12–18 months is healthy.
ARR by Stage
Under $1M: Product-market fit search. Finding a repeatable inbound or sales engine is priority #1.
$1M–$10M: Repeatability validation. Growth starts shifting naturally from acquisition toward expansion.
$10M–$100M: Scale-up. Sales, marketing, and customer success organizations expand.
$100M+: Mature SaaS. Rule of 40, NRR, and operating margin become the center of investor conversations.
Ways ARR Gets Distorted
Multi-year prepay: Reflecting a 2-year contract as-is can inflate ARR. Practitioners normalize to an annualized basis.
Discounts and promos: Recording discounted contracts at face value distorts "list price" revenue. Separate Booked ARR from Run-Rate ARR.
ARR vs GAAP revenue: ARR differs from accounting revenue. GAAP only recognizes revenue over the period actually delivered.
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