What is annual recurring revenue?
Annual recurring revenue (ARR) looks at how recurring or subscription-based revenue grows over time. ARR is a good metric for long-term planning for subscription models that have longer contract durations.
How to calculate annual recurring revenue: formula and example
You calculate annual recurring revenue by multiplying your monthly recurring revenue (MRR) by 12 (months).
Let’s take a look at an example of how to calculate ARR. Your customer subscribes to a one-year contract with monthly billings of $500. The ARR for that customer is = $6,000. How the customer is billed is irrelevant to the formula. What is calculated is the total contract value for a year.
Examples of using ARR in financial planning
- Growth from new contracts, including those with different term lengths
- Net and gross expansion/contraction from existing customers
- Trends in your average selling price
- Everything you need to know about recurring revenue
- SaaS retention benchmarks: How does your company compare? ChurnZero webinar featuring Rob Belcher, managing director at SaaS Capital
- Key SaaS and Customer Success metrics you should care about with You Mon Tsang, CEO and co-founder, ChurnZero and Dave Kellogg, Dave Kellogg Consulting
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