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Annual Recurring Revenue (ARR)

Finance

What is Annual Recurring Revenue?

Annual Recurring Revenue (ARR) is the current annual value of predictable and repeatable income from customers with active subscriptions. It reflects the health of your core business and is exclusive of one-time payments or fees.

How is Annual Recurring Revenue (ARR) used?

This metric is used for mainly growth tracking, forecasting, and planning. It can help assess the health of the business, track the impact of customer acquisition and churn, and inform resource allocation. ARR is a much-discussed metric during fundraising and is also a key factor in valuing companies that seek to raise, go public, or be acquired.

How to calculate Annual Recurring Revenue (ARR)

Total # Customers x Average ARR per Customer

To calculate ARR, multiply the total number of customers by the average ARR per customer. This formula helps you understand the yearly income generated from your active subscriptions.

Best Practices

To fully leverage ARR, compare it alongside Customer Acquisition Cost (CAC), Churn, and Expansion. Segment ARR to analyse different product or customer cohorts. Use it as a baseline to assess efficiency of scale and as an indicator of demand trajectory.

Common Misconceptions

ARR should not be confused with cash flow as it only accounts for contracted recurring revenue, not cash received. One-off payments should not be included in the ARR calculation. Try not to use ARR as a standalone metric; it should instead be viewed alongside revenue quality and Average Lifetime Value (LTV).

"If a company starts the year with $100k in January MRR and adds $10k of recurring revenue each month, they'll end the year at $1,860,000 in revenue. Because their December MRR will be $210,000, their end of year ARR is $2,520,000, 35% higher than revenue. Because ARR is such a helpful metric, it's often used to generate valuation for fundraising or an exit."

Haley Bryant
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Hustle VC

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FAQs

What are the main drivers of Annual Recurring Revenue (ARR)?
  • Number of customers
  • Churn
  • Average Deal Size
How should I break down Annual Recurring Revenue (ARR)?
  • Industry vertical
  • Geography
  • Company size
  • Product
  • Acquisition channel
  • Acquisition source/medium

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