Annual Recurring Revenue (ARR)

For SaaS companies, Annual Recurring Revenue is an important metric to track. It measures the current revenue the company generates in a 12 month period.

For companies that sell subscriptions or services Annual Recurring Revenue (ARR) is calculated by taking the total contract value and dividing it by the number of years. If your subscriptions are monthly you can simply multiply by 12.

For example, if Acme Corporation sells a 2 year subscription to Widgets Inc for $50,000 then the subscription represents:

$50,000 / 2 = $25,000 of ARR

Bear in mind, only recurring services should be used when calculating ARR. One time fees such as training days, implementation fees, and customization fees should not be included unless they renew with the base subscription.

Annual Recurring Revenue is a fairly simple calculation and can provide more insight when calculating other SaaS metrics such as Churn and Renewal.