ARR (Annual Recurring Revenue)
The annualized value of a company's recurring subscription revenue, the standard growth metric for SaaS businesses.
ARR is the yearly value of all active recurring subscription contracts, normalized to a 12-month basis regardless of actual billing frequency. It excludes one-time fees, services revenue, and non-recurring charges, focusing purely on the predictable, repeatable revenue base a company can count on continuing.
ARR is the primary metric investors use to size and value B2B SaaS companies, both for growth-rate tracking (year-over-year ARR growth) and for valuation multiples (revenue multiple applied to ARR). It's most meaningful for genuinely recurring subscription businesses; usage-based or highly variable revenue models often report ARR alongside other metrics that better capture volatility.
ARR is the language investors use to size, compare, and value subscription software companies. Growth is measured as year-over-year ARR growth, retention as net revenue retention against the ARR base, and valuation as a multiple of ARR. Because it annualizes the current run rate, ARR turns this month's book of business into a forward-looking picture of the company.
Multi-year and prepaid contracts are where ARR gets misreported. A customer who signs a three-year, $300,000 contract paid up front contributes $100,000 of ARR, not $300,000. Usage-based revenue is another gray zone: the contracted, committed portion can count, but purely variable usage should be reported separately with clear disclosure.
Quote ARR growth together with retention. Growing ARR quickly while net revenue retention sits below 100% means the company is refilling a leaky bucket with expensive new sales — and sophisticated investors will ask for both numbers anyway.
ARR = MRR x 12A company has $420,000 in monthly recurring revenue as of this month. ARR = $420,000 x 12 = $5.04M.
Report ARR consistently and conservatively — exclude one-time revenue, be explicit about how you treat multi-year contracts (annualized, not booked as a lump sum), and investors will trust your numbers far more than a company that inflates ARR with non-recurring revenue.
Is ARR the same as total revenue?
No — ARR only counts recurring subscription revenue annualized, excluding one-time fees, professional services, and other non-recurring income that might appear in total reported revenue.
What's the difference between ARR and MRR?
MRR is monthly recurring revenue; ARR is MRR multiplied by 12. Early-stage companies often talk in MRR because the numbers move month to month, then switch to ARR as they scale. They measure the same base on different time scales.
Should usage-based revenue count toward ARR?
Only the contracted, recurring portion. Purely variable usage isn't recurring in the subscription sense, so most investors want it reported separately or clearly labeled.
Why do investors value SaaS companies on an ARR multiple?
Because recurring revenue is predictable and compounds: retained revenue plus expansion minus churn gives next year's starting base before any new sale. The multiple itself moves with growth, retention, and market conditions, which is why two companies at the same ARR can be valued very differently.
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