Annual Recurring Revenue (ARR) is a key performance metric used by businesses with subscription-based models. It measures the value of recurring revenue that a customer contract will bring in each year. ARR calculations only include predictable revenue and exclude one-time fees or variable fees based on usage.
ARR is particularly relevant for Software as a Service (SaaS) companies, but any company with recurring revenue can use it. It provides a clear picture of a company's financial health and future growth prospects by showing the revenue that can be expected to recur annually. It's a snapshot of the revenue that a company can expect in the next 12 months, assuming no changes in the customer base.
While ARR refers to the annual recurring revenue, MRR (Monthly Recurring Revenue) refers to the monthly recurring revenue. Both are critical metrics for subscription businesses, but they measure different periods.
ARR is typically calculated by multiplying the total number of customers by the average revenue per account (ARPA), excluding one-time charges and variable fees.
Financial software like Quickbooks and Xero can help businesses track and calculate ARR. There are also specialized SaaS metrics tools like ChartMogul and ProfitWell.
Tracking ARR helps businesses predict their future revenue, making it easier to plan and budget for the future. It also provides insights into customer behavior, which can help in improving retention strategies.
In conclusion, ARR is a critical metric for any subscription-based business. It provides a clear picture of a company's financial health and can help guide decision-making and strategy.