Annual Recurring Revenue (ARR)

Annual Recurring Revenue (ARR) is recurring revenue, as defined by your revenue recognition policy, calculated annually. ARR is the sum of subscription recurring revenue on an annualized basis. ARR should not include one-time fees or professional services, even if they are recurring.

What is it: ARR measures the expected revenue from products and services sold with contracts lasting at least 12 months. It is commonly used by subscription-based businesses, such as software as a service (SaaS) companies, to track revenue.

Why is it necessary: ARR is an essential metric for subscription-based businesses. It can help businesses to track their revenue growth and to forecast their future revenue. ARR can also be used to set pricing for subscription-based products or services.

Formulas: Yes, there is a formula associated with ARR. The formula is as follows: 

ARR = (Total contract value) / (Number of years in the contract) * (Number of months per year)

How can this be used for startups: Startups can use ARR to track their growth and forecast future revenue. ARR can also be used to set pricing for subscription-based products or services.