What Is ARR (Annual Recurring Revenue)?
ARR is the annualised value of your subscription revenue. The most important metric for any SaaS or subscription business.
Key Takeaways
- ARR = Monthly Recurring Revenue x 12
- Only include recurring contracted revenue — not one-off payments
- New ARR, expansion ARR, churned ARR, and net new ARR tell the full story
- ARR growth rate is the key metric for SaaS investors
Definition
Annual Recurring Revenue (ARR) is the annualised value of all active subscription or recurring contracts. It represents the predictable, contracted revenue the business will generate over the next 12 months, assuming zero churn.
How to calculate ARR
ARR is Monthly Recurring Revenue (MRR) multiplied by 12. If you have 200 customers each paying £100 per month, MRR is £20,000 and ARR is £240,000. The key rule: only include recurring revenue — one-off setup fees, professional services, and ad hoc charges do not count.
The four components of ARR
New ARR is revenue from new customers signed this period. Expansion ARR is additional revenue from existing customers who upgraded. Churned ARR is revenue lost from customers who cancelled. Net New ARR is new plus expansion minus churned. Healthy SaaS businesses aim for expansion ARR to exceed churned ARR — called negative net revenue churn.
ARR vs accounting revenue
ARR is a forward-looking snapshot — what you are contracted to earn over the next year. Accounting revenue follows recognition rules — for an annual contract you recognise one twelfth per month as it is earned. ARR is used by operators and investors; accounting revenue is used by accountants.
Why investors care about ARR
SaaS companies are typically valued as a multiple of ARR — commonly 3x to 10x depending on growth rate and retention. ARR is predictable and contracted, making it a more reliable valuation foundation than lumpy transactional revenue. The higher your growth rate and lower your churn, the higher the multiple you can command.