Annual Recurring Revenue (ARR) is the total annualized value of a subscription. ARR measures the amount of predictable and recurring revenue a company can expect over the course of a year. ARR is one of the most popular revenue metrics for SaaS businesses, as it represents the likely revenue current customers will produce over the next year.
What is ARR?
Let’s take a look at a list of products that were purchased from a customer and calculate ARR:
ARR is only the sum of subscription products, so we only want the total amount from the Annual Platform Fee and User seats. The total ARR from this customer is $4,500 + $750, or $5,250. Note that we ignore the Starter Implementation product, as it is one-time revenue.
How do I calculate ARR?
Let’s look at a few examples on how to calculate ARR in different cases:
For a one year contract with no expansion or contraction, ARR would equal the revenue from that customer for the year. If we have a customer that bought a subscription for $9,600 ARR in January, we can represent their ARR in the following way:
In each month, we expect $800 of revenue ($9,600/12 months = $800 per month). However, the expectation is that the ARR (or the expected Annually Recurring Revenue for the next year) is $9,600 for each month.
If there is expansion or contraction, ARR reflects the revenue that would be received if the most recent version of the contract continues for another year. Let’s start with the same customer from above but add in an ARR downsell in March and an ARR upsell in July - we can represent the ARR, changes in ARR, and monthly revenue in the following way:
With the downsell in March, the ARR decreased to $7,800, and the monthly revenue expectation decreased to $650. With the upsell in July, the ARR increased to $12,000, and the monthly revenue expectation increased to $1,000. Note that in both cases, ARR is the forward-looking expectation of revenue for the next 12 months, and always reflects the most recent contract.
How much ARR should I have?
While ARR benchmarks vary by industry and company age, there are some general targets for ARR and growth rates to consider. The table below details some benchmarks for ARR, YoY (Year over Year) Growth, and CMGR (Compound Monthly Growth Rate):
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