Annual recurring revenue (ARR) is the revenue generated from recurring customer subscriptions on an annual basis. ARR takes into account the value of all active subscriptions and recurring revenue streams, such as monthly or annual subscription fees, but excludes one-time or non-recurring charges like setup fees, onboarding costs, or professional services.
How do you calculate ARR?
To calculate ARR, you sum the total value of all active recurring subscriptions over a one-year period. For example, if you have 100 customers, each paying a $100 monthly subscription fee, the ARR would be:
ARR = (100 customers) x ($100 per month) x (12 months) = $120,000
ARR provides insights into the stability and predictability of the company’s revenue. By tracking ARR, companies can gauge the effectiveness of their customer acquisition and retention strategies, forecast future revenue, and make informed decisions about resource allocation, product development, and business growth.