Annual Recurring Revenue (ARR)
A forward-looking metric that annualizes the recurring revenue of a subscription business, normalizing contract lengths to a 12-month period.
FORMULA
ARR = (Monthly Recurring Revenue × 12) or (Total Contract Value / Term in Years)Why it matters
Annual Recurring Revenue is the fundamental valuation metric for subscription businesses. It strips out one-time fees, setup costs, and professional services to reveal the core, predictable revenue engine. Investors use ARR to determine revenue multiples, making it the primary driver of enterprise value. Unlike trailing twelve months (TTM) revenue or GAAP revenue, ARR is a forward-looking momentum indicator. A business with $10M in ARR might only have $8M in recognized GAAP revenue for the year, but the ARR tells the board exactly what the revenue baseline is entering the next period. It provides the denominator for critical efficiency metrics like the Burn Multiple and the Rule of 40.
2025 BENCHMARK
According to SaaS Capital's 2025 report, the median growth rate for private SaaS companies under $10M ARR is 35%, scaling down to 25% for companies between $10M and $20M ARR.
COMMON MISTAKES
- Including one-time professional services or setup fees in the ARR calculation.
- Recognizing full annual contract value (ACV) for contracts with exit clauses before month 12.
- Failing to deduct known churn from forward-looking ARR projections.