Annual Recurring Revenue or ARR is a business metric mostly used by SaaS businesses or businesses operating on a subscription basis. ARR is the annual revenue that the business can expect to generate from the renewal of their services done by its existing clientele. ARR Annual Recurring Revenue, as the name suggests, is the total recurring revenue that the business can generate from their current clients. Essentially, ARR can also be seen as the annualised Monthly Recurring Revenue.
ARR is an important metric for businesses when they are planning to scale up. It gives them an insight about their sustainability as well as the retention of their user base. Basically, if a business ever fails to generate enough revenue from new customers then the ARR will save the business from going down under. Every organisation can have a different formula for calculating Annual Recurring Revenue but we have a simple one for your easy understanding.
ARR = Total revenue from renewals in an year + Revenue from any plan upgrades + Revenue from any upselling – Revenue lost due to subscription cancellations (churn)
Putting the above formula into words, Annual Recurring Revenue is simply the money left after summing up all the revenue from renewals, upgrades and upselling and deducting the revenue lost due to cancellations of subscriptions.
