ARR (Annual Recurring Revenue)

ARR is a measure of the predictable and recurring revenue components of the revenue flow, such as subscriptions or maintenance. It is important to consider that annual recurring revenue always excludes one-time fees. Very simply ARR could be defined as MRR multiplied by 12.

In your organization, you define "annual recurring revenue" and more importantly the rules for calculating and presenting it. when communicating annual recurring revenue information to people outside your organization, it is important to understand your definition and calculations and be able to communicate the logic and reasoning behind the definitions and calculations when presenting your ARR metrics to venture capital firms and investment bankers.

ARR components always exclude one-time fees and, for most organizations, would exclude variable usage and consumption rates.

ARR is a metric sometimes used by subscription firms that use annual or multi-year term contracts. Like the more common and popular metric MRR or Monthly Recurring Revenue, ARR is a metric that represents the standardized value of recurring revenue. And while sometimes used in businesses with annual or longer terms, Annual Recurring Revenue is a metric rarely used in a monthly subscription model or a hybrid monthly/annual business.

For most businesses, the important thing about ARR is driving business growth. Typical ARR components are the following:

• ARR added from new sales.
• ARR retained from renewals.
• ARRs added from upgrades and price increases at renewal time.
• ARRs lost due to downgrades and product changes or at renewal time.
• ARRs lost due to loss of customers or revenue.

The ARR of these components is usually measured in both absolute and relative values and is often presented in the context of incremental changes from period to period.