Related Terms
Annual Recurring Revenue (ARR) represents the total predictable revenue a business expects to receive from subscription customers over a year. ARR provides a long-term view of the revenue stream and helps in forecasting future revenue and growth potential. It's a crucial metric for businesses with annual or multi-year contracts.
How to Calculate ARR:
ARR is calculated by annualizing the Monthly Recurring Revenue (MRR) or by directly summing up all recurring revenue expected for the year.
Formula:
Alternatively, if calculated directly:
Examples:
1. Basic Example: A company has an MRR of $10,000. The ARR is:
\[ARR = 10,000 \times 12 = 120,000 \text{ USD}\]
2. Direct Calculation Example: A company has 10 customers, each with an annual subscription fee of $1,200. The ARR is:
\[ARR = 10 \times 1,200 = 12,000 \text{ USD}\]
Key Considerations:
- Exclude One-Time Revenue: Only include recurring revenue in ARR calculations. Exclude any one-time fees or purchases.
- Adjust for Cancellations and Upgrades: If customers cancel or upgrade/downgrade their subscriptions, ARR should be adjusted accordingly.