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' 2026 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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