Annual Recurring Revenue (ARR) is the value of your firm's subscriptions' contracted recurring revenue components normalized to one year. This metric is commonly used by SaaS businesses that have a subscription-based model.
While calculating ARR, you must not consider any one-time fees or other cash flows. Instead, only think about the revenue earned through subscriptions. Companies can also monitor various aspects of ARR (such as ARR from new clients, ARR from product upgrades, etc.) to understand what contributes the most toward revenue generation.
Below is the general formula to calculate the Annual Recurring Revenue:
Annual Recurring Revenue (ARR) = Sum (Annual Recurring charge of all the paying customers)
Annual Recurring Revenue (ARR) = Contract Value * (12 / Duration of the contract in months)
Annual Recurring Revenue (ARR) = Contract Value / Duration of the contract in years
It is important to note if all the charges mentioned in the invoice are one-time or recurring.
ARR vs MRR: How to calculate each?
Annual Recurring Revenue (ARR) is generally calculated for contracts with at least one year. On the other hand, if the contract duration usually is less than one year, it could be more beneficial to track ARR. In these short-term contracts, Monthly Recurring Value (MRR) provides a more accurate representation of the revenue.
You can calculate the MRR by simply multiplying the number of paid monthly customers by the average revenue per user per month.
ARR is an essential metric that helps SaaS businesses to understand the following aspects:
The business growth of a new company is generally volatile. So, here are some benchmarks that can help you to compare your ARR with other companies:
Here are a few examples of how you can calculate the Annual Recurring Revenue (ARR):
ARR = Contract Value * (12 / Duration of the contract in months)
ARR = $50,000 x (12/24) = $25,000.
ARR = Contract Value / Duration of the contract in years
ARR = $90,000 / 3 = $30,000.