What is ARR? (Annual Recurring Revenue)

ARR is the value of your recurring subscription revenue over twelve months, normalized into a single annual number.

How does ARR work?

Take the recurring revenue you are contracted to receive and express it as a yearly rate. Monthly recurring revenue times twelve is the usual shortcut. Include subscriptions, recurring platform fees, and expansion. Exclude setup fees, professional services, hardware, and anything a customer will not automatically pay again. ARR is a run rate, not accounting revenue: it says what the current book is worth annually, not what you booked last year.

Why does ARR matter?

It is the number investors value the company on and the number every SaaS benchmark runs on. It also breaks apart into pieces you can act on. New ARR, expansion ARR, and churned ARR tell you whether growth comes from sales, from existing customers, or from a bucket with a hole in it. Divide ARR by customers and you are back at annual contract value.

Where did ARR come from?

It came out of the subscription business model shift of the 2000s, when software stopped selling perpetual licenses and needed a metric that reflected recurring rather than one-time revenue.

How do you use ARR well?

Write down your definition and stick to it, because ARR is unaudited and easy to inflate. Do not annualize one strong month of usage-based revenue and call it contracted. Report gross and net separately so churn stays visible. And always pair ARR with burn: $10 million built on $30 million of spend is a different company than $10 million built on $8 million.

Bottom line: ARR is what your current customers are worth over a year, assuming none of them leave.

For more startup terminology, visit startupdefinitions.com.