If you're in the SaaS or subscription-based business world, you've probably heard the term Annual Recurring Revenue—or ARR—thrown around a lot. And while ARR might sound like a pirate's favourite metric, it's actually one of the most important numbers in the SaaS world.
Whether you're a startup founder, a finance nerd, or just someone trying to make sense of those mysterious monthly reports, understanding ARR can be a total game-changer.
So grab your metaphorical telescope, for we're diving into everything you need to know about this golden metric of predictable revenue.
Annual Recurring Revenue or ARR is the total amount of predictable, recurring revenue that a business expects to receive annually from its customers under active subscriptions. It is a metric used primarily by subscription-based businesses, like SaaS companies, to measure the value of their recurring revenue streams over a 12-month period.
To take a simple example, if a customer pays $1,000 per year for a subscription, then ARR = $1,000.
If a customer is on a monthly plan and pays $100/month, then ARR = $100 × 12 = $1,200.
ARR is one of the most important metrics that SaaS businesses track. Here are 5 key reasons why ARR is so important for SaaS companies:
SaaS businesses rely on recurring subscriptions, and ARR gives a clear picture of predictable future revenue. This stability helps with budgeting, forecasting, and long-term planning.
ARR makes it easy to see whether you're growing, stagnating, or churning customers. Metrics like ARR growth rate, new ARR, expansion ARR, and churned ARR help dissect business performance in detail.
Investors love ARR because it shows consistent cash flow and business viability. High ARR and low churn is a good indicator of a healthy, scalable SaaS company. For this reason, it is often used as a key valuation metric for fundraising or acquisition.
ARR helps businesses assess their sales and marketing effectiveness. For instance, it helps understand whether marketing campaigns are converting into long-term paying customers. This, in turn, guides resource allocation in SaaS companies.
ARR lets SaaS businesses benchmark against industry standards and competitors, giving them an idea of how they're performing relative to others in the space. Not just this, ARR is also used to classify SaaS businesses into categories. For instance, SaaS businesses with an ARR of less than $1 million are often called early stage startups. Businesses with an ARR of between $1 to 10 million are labelled growth stage businesses, while those with an ARR of over $10 million are said to be in the scale stage.
Now that we know that ARR is perhaps the most important metric that SaaS companies keep track of, we turn to understanding exactly how they do this. In other words, what are the key performance indicators and ARR components which help SaaS businesses in their strategic decision-making?
Here's a quick peepunderthe ARR hood.
SaaS businesses use ARR to continuously monitor revenue growth. This shows how fast a company's recurring revenue is increasing.
ARR growth rate can be calculated by subtracting the previous ARR from the current ARR and expressing it as a percentage of the previous ARR, as shown in the formula below:
ARR Growth Rate = ((Current ARR – ARR at start of period) / ARR at start of period) × 100
Example: If ARR was $1M last year and is $1.5M now, then
ARR growth = (1.5M – 1M) / 1M × 100 = 50%
ARR can be dissected into parts to see what's really driving performance. These include
Net New ARR = (New + Expansion) – Churn
Tracking these components shows whether growth is coming from new sales, upsells, or better retention.
Churned ARR reveals how much recurring revenue is lost over time. A high churn rate can indicate issues with product-market fit, customer support, or onboarding. Conversely, a low churn rate indicates good customer retention.
Monthly or quarterly ARR tracking makes it easy to compare periods, set targets, and build accurate revenue forecasts. It also feeds into KPIs like Customer Lifetime Value (CLTV) and CAC Payback Period. To learn more about key reporting metrics that SaaS businesses should track, have a look at our detailed SaaS reporting guide.
ARR is the predictable, recurring revenue a company expects to receive from its subscription-based customers each year. Revenue, on the other hand, is simply the total income a company earns from all sources during a period, whether monthly, quarterly, or annually.
While the two might sound similar on the surface, they are fundamentally different. Here's a quick summary of each.
ARR Key Traits:
Formula Example: If a customer subscribes at $100/month:
ARR = $100 × 12 = $1,200
Revenue Key Traits:
For better understanding, we've summarized the differences between annual recurring revenue and revenue in the table below.
Key Differences
|
Feature |
ARR |
Revenue |
|
Focus |
Predictable, recurring income |
All income (recurring + one-time) |
|
Used By |
SaaS, subscription-based businesses |
All businesses |
|
Time Frame |
Annualized |
Reported per period (monthly, yearly) |
|
Predictive Value |
High (for forecasting) |
Medium |
When to Use Each
Calculating annual recurring revenue is easy. Simply multiply the predictable monthly recurring revenue by 12. The formula to do this is as follows: ARR = MRR × 12
Where
So, if your company earns a consistent amount in monthly recurring revenue (MRR), you can calculate ARR by simply multiplying the MRR by 12. Here are a few examples to better understand how ARR calculation works in real life.
Sample ARR Calculation Scenarios
Now that we know how to calculate annual recurring revenue, it is clear that to do so, we need to know the MRR first. In an ideal world, the MRR would stay the same throughout the year, and there would be no churn at all. However, the world is far from perfect, and real-life ARR calculations have to take into account all sorts of complex scenarios.
Below you can find examples of ARR calculation in different scenarios.
Scenario 1: Flat MRR Across All Months
Scenario 2: Growing MRR Over Time
Let's say your MRR grows each quarter:
Now here we have two options. We can either take the average of these four values, or we can take the latest MRR, which is to say, the Q4 MRR for the purposes of our calculation. Usually, the latest MRR is preferred since ARR is a forward-looking metric often used for forecasts and projections. The assumption here is that your Q4 MRR is the new baseline for the next 12 months.
If we take the latest MRR as a basis for ARR calculation, then
Scenario 3: MRR with Churn and Expansion
As already discussed, churn rate refers to the loss of subscribers in a given time period. Pretty much every subscription-based business in the world loses some paying customers over a period of time, so this is a very realistic scenario. Here's what a simple ARR calculation would look like, taking churn into account.
Besides ARR, SaaS businesses often have to deal with another related metric known as CARR. In this section, we look at what CARR is and how it differs from ARR.
Contracted Annual Recurring Revenue (CARR) is the total value of all contractually committed recurring revenue on an annualized basis, regardless of whether the revenue has started billing yet.
It's like ARR, but includes both:
Unlike ARR, which only accounts for active and recognized recurring revenue, CARR includes:
As an example, suppose you signed a $12,000/year contract in March that starts billing in July. Then, your ARR in March is $0, since revenue hasn't started yet.
However, CARR for the month of March would be $12,000, since it's contractually secured.
Although ARR is the gold standard for measuring and forecasting in the SaaS industry, there are times when CARR is preferred over ARR. CARR is especially useful when:
Here's a handy table quickly summarizing the differences between ARR and CARR.
|
Metric |
Includes Active Revenue |
Includes Future/Committed Revenue |
Use Case |
|
ARR |
Yes |
No |
Revenue recognition & performance |
|
CARR |
Yes |
Yes |
Sales performance & forecasting |
If you're looking to scale your ARR, it's not just about acquiring more customers—it's about maximizing revenue from every stage of the customer lifecycle. Below, we explore proven strategies to grow ARR and how each ties into scalable, long-term business impact.
Upselling and cross-selling are powerful levers for ARR growth. By encouraging customers to move to higher-tier plans or purchase complementary products and services, you increase the average revenue per user (ARPU). The key to effective upselling is timing and relevance. Monitor customer usage patterns and offer upgrades that match their evolving needs. Whether it's access to premium features or additional user licenses, a thoughtful upsell strategy turns existing customers into higher-value accounts.
Tiered pricing allows you to cater to a broader audience by offering different levels of service based on customer needs. This strategy makes your product accessible to small businesses while still appealing to enterprise clients willing to pay for advanced features. Align each tier with clear value propositions, and make sure customers see the benefit of moving to higher levels. A well-designed pricing structure not only attracts diverse customer segments but also encourages natural revenue expansion over time.
Another related tactic that businesses can deploy here is offering free trials to hook customers into buying their paid services. If this is a tactic that interests you, have a look at this detailed guide to leveraging the power of free trialsand eventually increasing the free-to-paid conversions.
Customer retention is just as important as acquisition when it comes to ARR. Reducing churn means more of your recurring revenue stays intact. Invest in customer success programs that ensure users realize the full value of your product. Strong onboarding, regular check-ins, responsive support, and proactive engagement based on usage data can significantly improve retention. Even a small reduction in churn can result in substantial ARR gains due to the compounding nature of recurring revenue.
To know more, have a look at our detailed guide to understanding churn in SaaS, and what you can do to manage it.
A faster sales cycle allows you to recognize revenue sooner, which contributes directly to ARR. Streamlining your buyer journey—from awareness to purchase—helps you close more deals in less time. Tools like product demos, case studies, and clear ROI messaging can reduce friction and boost conversion rates. Equipping your sales team with the right materials and training further accelerates this process, creating a predictable flow of recurring revenue.
Encouraging customers to switch from monthly to annual billing can have a significant positive impact on ARR. Offering incentives such as a discount, bonus features, or extended trial periods for annual commitments locks in revenue for a longer period and improves cash flow. Annual billing also reduces churn, as customers are less likely to cancel when they've paid upfront. This strategy boosts ARR while simultaneously increasing customer lifetime value.
Usage-based pricing allows your revenue to scale with customer activity. Instead of flat-rate billing, customers pay based on how much they use your product. This model is especially effective for businesses where usage grows alongside the customer's success. Hybrid models that combine flat rates with variable charges can also offer flexibility. These pricing structures align your success with that of your customers, creating a built-in mechanism for ARR growth.
Entering new markets or targeting new verticals can open the door to entirely new revenue streams. This might involve localizing your product for international markets, developing niche features for specific industries, or tailoring your messaging to resonate with new buyer personas. Use data from your ideal customer profile (ICP) to identify high-value opportunities. Market expansion allows you to grow ARR without relying solely on your existing customer base.
The table below shows how some of the most important tactics listed above drive ARR, and how (and how much) they can be scaled.
|
Tactic |
Revenue Driver |
Scalability |
|
Upselling |
More $$ per customer |
High – leverages existing base |
|
Tiered Pricing |
Market segmentation |
High – reusable structure |
|
Customer Success |
Reduced churn |
Medium – scalable with automation |
|
Market Expansion |
New customers |
High – especially via digital channels |
|
Usage-Based Pricing |
Revenue per activity |
Very high – aligns with customer growth |
To truly understand and optimize ARR, it's essential to track the SaaS metrics that offer the clearest insights into revenue health and growth potential. These metrics serve as leading indicators for strategic moves and help identify opportunities for expansion, retention, and efficiency.
Here's a look at the key ARR-focused SaaS metrics you should be monitoring. Some of these metrics we've already encountered, such as MRR and churn rate, since these are fundamental to understanding and calculating ARR. Others, however, are new. We're listing all of them below so that you have a ready reckoner for every metric that matters for ARR.
MRR is the foundation of ARR. Tracking MRR helps you identify short-term changes and trends in recurring revenue. When multiplied by 12, it gives you the base ARR. Breaking MRR down into components—like new MRR, expansion MRR, and churned MRR—gives you detailed visibility into the sources of growth or decline.
Customer churn measures the percentage of customers who cancel their subscriptions over a given period. Revenue churn tracks the value lost from these cancellations. High churn rates are a red flag, especially for ARR, since lost customers not only reduce current revenue but also limit future upsell opportunities.
LTV represents the total revenue a customer generates during their entire relationship with your company. A high LTV suggests strong product-market fit and effective retention strategies. It also justifies higher acquisition costs and supports ARR growth over the long haul. Netflix, for instance, has a customer lifetime value of around $515, meaning that an average Netflix subscriber generates a revenue of $515 for Netflix before they unsubscribe. This is a pretty good number by industry standards, and allows Netflix to spend more on acquiring new customers.
CAC tells you how much you spend to acquire a new customer. When combined with LTV, it provides insight into profitability. A healthy ARR growth strategy should aim to lower CAC while increasing LTV, optimizing the LTV: CAC ratio.
Here's a detailed guide to customer acquisition cost for SaaS companies in case you want to dig deeper into this critical SaaS metric.
NRR measures revenue retained from existing customers after accounting for upgrades, downgrades, and churn. If your NRR is above 100%, your existing customer base is growing in value—indicating strong ARR momentum, even without new customer acquisition.
ARPU reflects the average monthly or annual recurring revenue per customer. Tracking changes in ARPU over time helps you assess the impact of upsells, cross-sells, and pricing changes on ARR. For example, this graph tracks how Netflix's monthly ARPU grew rapidly between 2016 and 2024, reaching $11.5 in 2024.
This metric shows how much revenue is gained through upselling and cross-selling existing customers. It directly influences NRR and highlights the scalability of your product within your current user base. You can learn more about this SaaS metric here.
Gross Dollar Retention reflects revenue kept without factoring in expansion, while Net Dollar Retention includes upsells. These metrics show the resilience of your ARR and how well your customer success efforts are paying off.
For a more in-depth analysis of SaaS metrics, have a look at our detailed guide to the most important SaaS marketing metrics.
ARR is only valuable if calculated and interpreted correctly. Avoiding common ARR calculation mistakes ensures you're making strategic decisions based on accurate data. Here are the top missteps to watch out for:
ARR should only reflect revenue that recurs annually. One-time fees such as setup charges, consulting projects, or non-renewable contracts should not be included. Mixing in non-recurring revenue inflates your ARR and can lead to misguided financial projections.
Bookings represent total contract value, including non-recurring components and future commitments. ARR, on the other hand, captures the recurring portion on an annualized basis. Mistaking one for the other can result in overstated performance and poor revenue forecasting.
Avoid assuming contracts will auto-renew or last longer than the actual agreement. ARR should only reflect the committed portion of revenue. Counting contracts beyond their initial term without confirmed renewals leads to inflated ARR figures.
ARR must be regularly updated to account for customer churn and downgrades. If customers cancel or reduce their subscription plans, your ARR should reflect the change. Ignoring these shifts gives an inaccurate picture of revenue health.
While ARR is often derived by multiplying MRR by 12, inconsistencies in how MRR is tracked, such as including trial users or variable usage charges, can throw off your calculations. Ensure your MRR tracking is precise and standardized.
Free trials and temporary discounts should not be treated as full recurring revenue. Only include the actual contracted amount that is expected to recur annually. Counting discounted or trial periods at full value distorts your ARR.
Accurate ARR forecasting is essential for long-term business planning and strategic growth. It enables SaaS companies to anticipate future revenue, allocate resources effectively, and set realistic growth targets. Here's how to project ARR using key trends and metrics:
The foundation of ARR forecasting begins with your current Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR). This establishes a baseline, giving you a snapshot of where you are today before you project forward.
A key driver in ARR forecasting is churn—the rate at which customers cancel or downgrade their subscriptions. To maintain or grow ARR, you need a clear picture of both gross and net retention. Net Revenue Retention (NRR), which accounts for expansion revenue from upsells minus churn, is especially helpful. Forecasts should adjust for expected churn based on historical trends, seasonality, and any known risk factors.
Revenue gained from existing customers through upselling, cross-selling, and usage-based growth is critical to ARR forecasting. Analyzing your Expansion MRR or ARR allows you to predict how much additional recurring revenue can be expected from your current customer base. Look at past expansion patterns and use them to model future behaviour.
New customer acquisition forecasts should be tied to realistic sales projections, taking into account your sales funnel conversion rates, average deal size, and current pipeline health. This helps you model how much ARR growth will come from new logos over a given period.
Changes to pricing structures, the introduction of new tiers, or contract term adjustments can influence future ARR. If you're planning any pricing updates, include projected impact—both positive and negative—into your forecast.
Projecting ARR accurately involves more than multiplying your MRR by 12. It requires understanding historical patterns, tracking current performance indicators, and forecasting how each factor will evolve over time. Here are the key components:
Start by evaluating your past monthly recurring revenue (MRR) growth. Plot it out over the last 6–12 months to identify consistent growth rates, seasonal dips, or spikes. Use these trends to estimate future performance and set a foundation for your projection model.
Churn is a recurring revenue killer. Calculate both gross and net churn, and analyze how they've changed over time. Retention metrics—especially Net Revenue Retention (NRR)—tell you how much recurring revenue you're keeping and growing within your existing customer base. If your NRR is over 100%, it's a strong signal for ARR growth.
Examine how much of your ARR comes from existing customers upgrading their plans or increasing usage. Expansion revenue is a major growth lever in SaaS, and including this in your forecast ensures you're accounting for upsells, cross-sells, and usage-based increases.
Use your sales pipeline data to predict how many new customers will close over the coming months. Analyze your conversion rates, average deal size, and sales cycle length. This helps estimate how much new ARR will be generated and when it will be realized.
If you're launching new pricing tiers, products, or changing your billing model, factor those impacts into your forecast. For example, switching more customers to annual billing can boost ARR quickly, while pricing increases may initially slow growth but pay off long-term.
External factors like industry trends, economic conditions, or changes in customer behaviour can impact churn, acquisition, and overall revenue velocity. Be conservative when these indicators show headwinds, and optimistic but realistic when conditions are favourable. For instance, the global economic slowdown, especially in the IT sector has impacted the revenues of several SaaS giants such as Salesforce in 2024-25.
ARR forecasting supports budgeting, hiring plans, investor communications, and strategic decision-making. It enables proactive rather than reactive management, helping leadership set achievable goals and prepare for growth opportunities or downturns. With a forward-looking ARR forecast, you can align resources more effectively, assess product-market fit, and build a more resilient business model.
ARR growth is a multifaceted effort that extends beyond increasing subscription numbers—it's about creating a scalable, predictable revenue engine. From acquiring new customers to reducing churn and forecasting future growth, each tactic plays a crucial role in driving long-term success.
Understanding how to project ARR based on trends and metrics gives SaaS leaders the foresight they need to make smarter decisions. By analyzing historical MRR trends, incorporating churn and retention data, including expansion revenue, factoring in pipeline velocity, and staying responsive to pricing and market shifts, you'll be well-equipped to forecast with accuracy and confidence.
Mastering the art and science of ARR growth and forecasting can mean the difference between stagnation and sustainable success. With the right strategies in place and a forward-looking mindset, your ARR can become the engine that fuels lasting business growth.
Roketto specializes in helping businesses grow their revenue fast, yet sustainably. Get in touch with us to discuss how we can provide growth solutions tailored to your business needs.