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ARR (annual recurring revenue)

Also called: annual recurring revenue

Recurring subscription revenue expressed per year, usually MRR × 12. Buyers and investors often quote company value as a multiple of ARR.

ARR (annual recurring revenue) is recurring subscription revenue expressed per year, normally MRR × 12. It answers the question "if nothing changed, how much subscription revenue would the next twelve months bring?"

ARR is the language of valuations and deals. Buyers and investors compare software companies by ARR, and they often quote a price as a multiple of it ("three times ARR"). It is also handy for businesses that sell mostly yearly contracts, where a monthly figure feels artificial. For a small company that bills monthly, MRR is the number to run the business on and ARR is the number to talk to buyers with.

ARR is a snapshot, not a forecast and not revenue already earned. It assumes this month's customers all stay and pay the same for a year, which churn and price changes will not allow. It also only counts recurring revenue: one-off projects, setup fees and consulting belong elsewhere, however large they are.

Example

At the end of October in the first year GarageDesk's MRR is 37,400 UAH, so ARR = 37,400 × 12 = 448,800 UAH.

A year later, in October of year 2, MRR is 165,000 UAH and ARR = 165,000 × 12 = 1,980,000 UAH. A buyer offers 6,000,000 UAH for the company: 6,000,000 / 1,980,000 ≈ 3.03, so the offer is about three times ARR.

Common mistakes

  • Calling total yearly revenue "ARR". One-off fees and services are not recurring.
  • Annualizing a lucky month. If MRR jumped because of a one-time event, ARR built on it misleads buyers and you.
  • Treating ARR as guaranteed. With 5% monthly churn, a large part of today's ARR will be gone within a year unless it is replaced.
  • Comparing ARR multiples across very different businesses. Growth, churn and profit change what a fair multiple is.