Annual Recurring Revenue Definition for SaaS

For companies that rely on Annual Recurring Revenue as a core operating and board-level metric, Annual Recurring Revenue is probably the single most important SaaS metric.

Annual Recurring Revenue is a measure of the predicable and recurring revenue components of subscriptions. ARR usually excludes one-time and variable fees.

What is important about Annual Recurring Revenue is not a single number per se, but rather the momentum around the components of your company's ARR:

Annual Recurring Revenue from renewals
Annual Recurring Revenue from new sales
Annual Recurring Revenue from upgrades
Annual Recurring Revenue losses, or revenue churn

As is for most , there is no specific definition for Annual Recurring Revenue. In fact, there can be significant confusion over the term itself and measurement of Annual Recurring Revenue because it feels and sounds like "revenue" in the context of revenue recognition. However, ARR is not revenue recognition and is calculated very differently, which can cause confusion and turmoil in the finance department, the group typically tasked with calculating and reporting Annual Recurring Revenue.

It will be up to your organization to define what Annual Recurring Revenue is and most importantly the rules for calculating the components.

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