How is Annual recurring revenue (ARR) calculated?

ARR is calculated by taking the total recurring revenue from subscription contracts and annualising it by the charging interval, to reach a common representation of the amount, in an annual form.

The formula for calculating Annual recurring revenue (ARR) is:ARR = Total of all charges, normalised to annual charges

Example:

A SaaS subscription business has 10 customers.

9 of them have a annual contract (12 months) for £1200, that is paid in a monthly bill of £100 every month. The annualised amount of the 9 invoices to customer is: (£100 * 12 months) * 9 active customers = £10,800.

One customer pays a discounted rate of £500 upfront every 6 months. The annualised amount of the 1 invoice every 6 months to 1 customer is: (£500 * 2) * 1 active customer = £1000.

The current ARR for the SaaS subscription business is £11,800.

Why is Annual recurring revenue (ARR) important to measure?

ARR is an important metric for subscription businesses to monitor and understand in order to predict future growth of the business. After compiling and understanding ARR, it’s important to then deep-dive into what’s impacting it, by breaking it down into upgrade ARR, downgrade ARR, new customer ARR and churn ARR.

After measuring ARR, the ARR growth rate can be easily calculated. A company with a healthy ARR growth rate is typically adding new customers and expanding its reach.

What is the difference between ARR and MRR?

ARR is a metric that measures the stability and growth of a company's subscription-based revenue on an annual basis. MRR is a metric that measures the same thing but on a monthly basis.

What are some common uses for ARR?

ARR is a helpful metric for investors and analysts to assess the health of a subscription business. A company with a healthy ARR growth rate is typically adding new customers and expanding its reach. In contrast, a company with a declining ARR growth rate may be losing customers or failing to attract new ones.ARR can also be used to calculate other important metrics, such as customer lifetime value (CLV) and customer churn rate.