Customer Lifetime Value
MarketingThe total revenue you expect to earn from one customer across the entire relationship — the single number that tells you how much you can afford to spend…
Business & Strategy
Annual Recurring Revenue
ARR | MRR | Monthly Recurring Revenue
Robert KlimantCo-founder
What is Annual Recurring Revenue?
Annual Recurring Revenue, or ARR, is the value of contracted recurring revenue normalized to a one-year period. It is the headline metric for subscription businesses, especially SaaS. ARR is calculated from active subscriptions, excluding one-time fees, professional services, or non-recurring charges. Its monthly equivalent, MRR or Monthly Recurring Revenue, is ARR divided by twelve. Together they describe the predictable revenue base a SaaS company runs on.
Why it matters
ARR is the number boards, investors, and founders track because it strips out the noise. Revenue from a one-time setup fee or a consulting engagement looks the same in the bank as recurring revenue, but it is worth a fraction of it when you value the company. ARR tells you the engine, not the exhaust. The gotcha is treating ARR as growth. Net new ARR — bookings minus churn minus downgrades — is what actually moves the business. A company adding two million in new ARR while losing one and a half in churn is not growing. It is treading water with a leak.
How it works
Sum the value of every active recurring contract, annualized. A customer on a 1000 dollar monthly plan contributes 12000 in ARR. A customer on a 50000 annual contract contributes 50000. Add new business won that quarter, expansion from existing customers, then subtract churned customers and downgrades from the same window. The result is net new ARR. Most SaaS companies track ARR by cohort, by segment, and by motion — self-serve versus sales-led — to see where growth is actually coming from. Investors look at the absolute number, the year-on-year growth rate, and the net dollar retention. All three matter, and the cleanest companies report them together.
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