Annual Recurring Revenue (ARR)
What is Annual Recurring Revenue (ARR)?
ARR is the annualized value of all active subscription contracts. It includes revenue from new customers, renewals, and expansions — but excludes one-time fees, professional services, and usage-based revenue unless it’s recurring.
Basic Formula:
ARR = Σ (Contracted recurring revenue per customer × 12 months)
Or, if you already calculate MRR:
ARR = MRR × 12
ARR gives a standardized, forward-looking view of your subscription business across the entire year — making it ideal for strategic planning, sales goal-setting, and forecasting.
Why It Matters in B2B SaaS
- It’s the strategic version of MRR. ARR helps sales teams understand long-term deal value, not just this month’s contribution.
- It’s how most enterprise deals are quoted and tracked. Especially for AEs selling to mid-market or enterprise, ARR aligns better with how customers negotiate budgets and contract terms.
- It sets the foundation for annual quotas and territory plans. ARR is commonly used in comp plans, rep scorecards, and sales forecasts.
- It’s a must-have metric in boardrooms and investor decks. Growth in ARR is a key indicator of business momentum — especially when segmented by new, expansion, and churn.
How to Measure ARR
Step 1: Identify all active, recurring contracts — monthly and annual
Step 2: Normalize each to a yearly value
For monthly contracts, multiply by 12
For multi-year deals, use the annualized portion
Step 3: Exclude one-time charges, usage overages (unless recurring), and services
Step 4: Sum the annual contract value (ACV) across all customers
Best Practices
- Segment ARR by customer type or region to understand where growth is coming from
- Track ARR growth by rep, segment, and product line for better planning
- Use ARR to compare deal quality — a $10K logo vs. a $100K enterprise deal can have vastly different GTM implications
- Make sure ARR definitions are consistent across Sales, RevOps, and Finance
ARR gives your sales team a clear line of sight into the long-term value of every deal you close. It’s not just a finance number — it’s how you measure the impact of your pipeline on company growth. Whether you’re an SDR booking qualified meetings or an AE closing six-figure contracts, understanding ARR helps you think bigger and sell smarter.