Software Growth

ARR (Annual recurring revenue)

ARR is your current recurring revenue expressed as a yearly figure, usually MRR multiplied by 12. It is a run rate, not revenue earned over a year.

ARR answers a simple question: if nothing changed, how much recurring revenue would the business bring in over the next 12 months? It is the headline number for investors, acquirers and anyone comparing SaaS companies, because it puts monthly plans, annual plans and multi-year contracts on one yearly scale.

How to calculate ARR

Take your normalized MRR and multiply by twelve. ChartMogul defines it the same way in its metric glossary, as an estimate of what a subscription will earn over the next 12 months at its current MRR.

A product at $20,000 MRR has $240,000 ARR. You can also add up annual values directly: a customer on a $1,200 annual plan contributes $1,200 of ARR, and a customer paying $100 a month contributes the same.

What to leave out

The same rules as MRR apply. Strip out setup fees, implementation, consulting and other one-time charges, and exclude free trials. Bessemer's Atlas draws a useful line: ARR is recognized recurring revenue times twelve, while annual run rate revenue (ARRR) also includes non-recurring items such as services. If you report a number that includes services, call it run rate revenue, not ARR.

ARR vs MRR

They are the same data on different scales. MRR is the working number: it shows what changed this month and reacts quickly to a pricing test or a bad week of cancellations. ARR is the scale number: it is easier to compare against other companies and fits annual planning.

Dodo Payments suggests MRR for companies under roughly $1M ARR and for short contracts, ARR for fundraising and larger accounts with annual deals. That matches how most small teams behave. If most customers pay monthly, talk in MRR. If you sell annual contracts to a few dozen businesses, ARR is the natural unit.

ARR vs revenue

ARR is a snapshot of run rate today. Revenue is what you actually earned over a period. Suppose MRR grew steadily from $10,000 to $20,000 across a year. Ending ARR is $240,000, but revenue for that year is closer to $180,000, because early months were smaller. Neither is wrong, they answer different questions. Revenue, as recognized under accounting rules, also lags or leads cash depending on how customers pay.

ARR vs ACV and TCV

Annual contract value is the yearly value of one contract. ARR is the total across all customers. Total contract value covers the whole term. Stripe lays out the difference between the three clearly.

Common mistakes

  • Annualizing a spike. Multiplying one great month by twelve, or counting a single large usage invoice, inflates ARR. Use committed, repeating revenue only.
  • Including customers who have already given notice. If a contract ends next month and will not renew, it is not recurring. A forward-looking view like committed MRR handles this better.
  • Mixing currencies at inconsistent rates. Pick a rate policy and stick with it.
  • Calling a revenue run rate ARR when it includes services or pass-through fees.

Which to use as a small SaaS

Track MRR weekly or monthly and report ARR when someone outside the company asks, such as a buyer, a lender or a marketplace like Acquire. If you are selling the business, the multiple applied to ARR is the headline (see ARR multiple), so make sure your ARR number holds up under a line-by-line check against Stripe or your billing tool.

Sources

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