What is
ARR
?
Annual Recurring Revenue (ARR) is the yearly version of MRR, representing the value of the recurring revenue from a business’s subscriptions for a full year. ARR is the standard metric used by venture capitalists and public markets to value software companies. It is calculated by multiplying the current MRR by 12 or by summing the total contract value of all active annual subscriptions. ARR provides a macro view of the business scale and is used to benchmark performance against industry peers (e.g., reaching the 'Centaur' milestone of $100M ARR). Unlike GAAP revenue, which is a backward-looking accounting metric, ARR is a forward-looking operational metric that assumes all current subscriptions will continue for the next year. It is the most accurate reflection of a company's true size and growth potential. To scale ARR, businesses must balance new customer acquisition with high retention and expansion strategies, ensuring that the recurring base compounds over time.
Frequently asked questions.
Why use ARR over MRR?
ARR is the preferred metric for long-term forecasting and valuation benchmarking in the venture community.
How to calculate Net New ARR?
Formula: (New ARR + Expansion ARR) - Churn ARR.
Is ARR a GAAP accounting metric?
No, ARR is a non-GAAP operational metric used to measure the momentum of a subscription business.
Does ARR include one-time revenue?
Never. ARR must only include recurring revenue that is expected to continue for at least a year.
What is the 'Rule of 40' in ARR terms?
It's the sum of your ARR growth rate and your profit margin; it should exceed 40%.
