Annual Recurring Revenue (ARR) is revenue that a company expects to receive from its customers within a year.
This metric is commonly used by companies who offer business-to-business subscription-based products or services. Business-to-consumer companies generally calculate Monthly Recurring Revenue (MRR) instead of ARR. Since their subscription models are often monthly, the MRR is a more suitable metric.
The calculation of Annual Recurring Revenue considers only recurring revenue and excludes one-time fees. For example, if on the first day of a financial year the company has 1000 customers who all pay an annual subscription fee of $30 000, then at this point the ARR is $30 000 000.
Businesses use this metric to:
- measure their growth by comparing ARRs of different years;
- evaluate the success of their subscription models;
- forecast future revenues.
For more specific predictions, businesses use the Contracted (or Committed) Annual Recurring Revenue (CARR) metric. CARR takes into account known future upsell, downgrade, and churn that are not included in the calculation of ARR.
