Annual Recurring Revenue (ARR)
Why it matters
Recurring revenue is worth more than one-off revenue of the same size, because it is more predictable. That is why investors and buyers value a subscription company as a multiple of its ARR (see ARR multiple). For the owner, it also makes planning possible. Hiring, spending and cash needs can be set against income that is mostly already contracted.
A single ARR number can hide a lot. A business adding new customers fast while losing old ones can show healthy growth and still be weakening underneath.
How to apply it
Track ARR as a bridge from one period to the next:
- Start with the ARR at the beginning of the period.
- Add new customers and expansion from existing ones.
- Subtract downgrades and cancellations.
- The result is the ARR at the end.
Report the movements as well as the total, so growth from new sales is not confused with growth from existing customers.
What it is
ARR counts only revenue that repeats. For a subscription business with monthly plans, it is monthly recurring revenue multiplied by twelve. With annual contracts, it is the yearly value of each active contract added together. One-off income, such as set-up fees or a consulting project, stays out.
For example, 120 customers paying €250 a month give an MRR of €30,000 and an ARR of €360,000. ARR is a measure of commitment, not cash received and not recognised revenue, so it will not match the accounts exactly.
Common mistakes
- Counting one-off projects, setup fees or paid pilots as recurring.
- Annualising a single strong month of usage-based revenue.
- Including contracts that are signed but not yet live, which belongs in committed MRR.
- Counting free trials or heavily discounted promotions at full price.
