What is Annual Recurring Revenue (ARR)?
The Short Answer
Annual Recurring Revenue (ARR) explained simply
Annual Recurring Revenue (ARR) is the total value of a company's recurring revenue streams normalized on an annual basis. It includes all revenue from subscription agreements, maintenance contracts, and other predictable, ongoing income sources. ARR is a critical metric for subscription-based businesses because it provides a clear picture of the business's financial health and its ability to generate consistent income over time. It helps in forecasting future revenue and making strategic decisions about growth and investment.
Real-World Example
SaaS Company ARR Calculation
Imagine a SaaS company with 100 customers, each paying \$100 per month for a subscription. \n\nTheir Monthly Recurring Revenue (MRR) would be: \n\n\$100 (per customer) * 100 (customers) = \$10,000 MRR\n\nTo calculate ARR, you multiply the MRR by 12: \n\n\$10,000 (MRR) * 12 = \$120,000 ARR\n\nThis means the company expects to generate \$120,000 in recurring revenue over the next year from its current subscriptions.
Why this matters
ARR matters because it shows the predictable income a business can count on. For subscription businesses, it's a key indicator of stability and growth. It helps buyers and investors understand the long-term value of the business.
When looking at ARR, make sure to understand what's included. Some businesses might inflate it by adding one-time fees. Focus on truly recurring revenue.
When looking at ARR, make sure to understand what's included. Some businesses might inflate it by adding one-time fees. Focus on truly recurring revenue.
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