Annual Recurring Revenue
The annualized value of all active recurring subscription contracts, the primary revenue metric for SaaS businesses.
Annual Recurring Revenue (ARR) is the normalized, annualized value of all recurring subscription revenue from active customers at a given point in time. It is the foundational metric for SaaS companies, providing a stable, predictable view of revenue scale that monthly or trailing-twelve-months (TTM) revenue calculations can distort.
ARR is calculated by taking the Monthly Recurring Revenue (MRR) and multiplying by 12, or by summing the annual contract values of all active subscriptions. It includes only recurring components of contracts — usage fees, professional services, and one-time fees are typically excluded.
ARR serves multiple critical functions: it's the primary input for company valuation (revenue-multiple based on ARR growth rate and net retention), the denominator for many efficiency metrics (Customer Acquisition Cost payback, Sales Efficiency), and the base from which growth is measured (New ARR, Expansion ARR, Churned ARR).
ARR can grow in four ways: new customer acquisition (New ARR), expansion of existing customers through upsells and seat additions (Expansion ARR), and can shrink through downgrades (Contraction ARR) or customer cancellations (Churned ARR). Net New ARR = New ARR + Expansion ARR − Contraction ARR − Churned ARR.
Investors focus heavily on ARR growth rate, which is typically expected to exceed 100% year-over-year for early-stage SaaS companies ($1M–$10M ARR), slowing to 50–100% in the growth stage ($10M–$100M), and 20–50% for scale-stage companies ($100M+). The T2D3 (triple, triple, double, double, double) growth model is a common benchmark for venture-backed SaaS.
FAQs
What is the difference between ARR and revenue?
ARR is a point-in-time metric representing the annualized run rate of current recurring contracts — a forward-looking indicator. GAAP revenue is a historical measure of what has actually been recognized in the period. A company can have $10M ARR but report $8M in GAAP revenue in a year due to mid-year contract starts.
Should professional services revenue be included in ARR?
Generally no. ARR should only include predictable, recurring revenue from subscriptions. Professional services, implementation fees, and usage-based revenue above committed minimums are typically excluded because they are non-recurring or variable. Including them overstates true recurring revenue.
What ARR multiple is used to value a SaaS company?
ARR multiples vary widely based on growth rate, net retention, and market conditions. In 2021 bull markets, high-growth SaaS companies traded at 20–50x ARR. Post-correction (2022–2024), multiples compressed to 4–10x for most companies, with the highest-growth, profitable companies at 10–20x.
Related Terms
Monthly Recurring Revenue
The normalized monthly value of all active recurring subscriptions, the operational pulse metric for SaaS businesses.
Churn Rate
The percentage of customers or revenue lost within a given period due to cancellations or non-renewals.
Net Revenue Retention
The percentage of recurring revenue retained from existing customers including expansions, showing whether a customer base grows on its own.
SaaS Quick Ratio
A metric measuring SaaS revenue growth quality by comparing new and expansion MRR gained to churned and contracted MRR lost.
