ARR is an acronym for Annual Recurring Revenue and a metric used by SaaS or subscription businesses with Term subscriptions. ARR is the value of the contracted recurring revenue components of your term subscriptions normalized to a one year period.
There are no defined rules for the determination of ARR. Typically, ARR will include only committed and fixed subscription or recurring fees. ARR always excludes one-time fees and usually excludes any subscription consumption or variable fees.
In order to use ARR as a metric in your business, you should have Term Agreements of one year or more (or the majority of your Term Agreements should be one year or more). If your customers have the ability to cancel at anytime in the agreement with 30 days or other notice period, or they simply pay month-to-month, use MRR.
What is important about ARR is not a single number per se but rather the momentum around the components of your company's ARR:
Unlike MRR, which is a metric that can vary dramatically from real monthly revenue due to the variance in days in the month, ARR can correlate well with actual revenue if your subscriptions are in annual or true multi-year intervals. However, you can experience in ARR the same MRR jitter issue if your term subscriptions run for non-standard lengths, such as 15 months, or 30 months and 8 days.
In the end, you should have a clear definition of ARR and how it is calculated for your organization and be consistent in the calculation of it and communication of ARR metrics within your organization.
|Monthly Recurring Revenue||Customer Lifetime Value||How to Calculate MRR|