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.
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.
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.
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.
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).