Formula
How to Calculate ARR
Annual Recurring Revenue — the annualized value of a company's subscription or contract revenue. The primary revenue metric for SaaS and subscription businesses, used to benchmark growth, valuation, and fundraising.
Annual Recurring Revenue
ARR = MRR x 12
Where
- ARR
- = Annual Recurring Revenue
- MRR
- = Monthly Recurring Revenue
What Is ARR?
Annual Recurring Revenue (ARR) is the annualized value of all active subscription or recurring contract revenue. It represents the predictable, contractually committed revenue a SaaS or subscription business expects to receive over the next 12 months. ARR is calculated as the sum of all active monthly subscription values multiplied by 12, or directly from annual contracts. It excludes one-time fees, professional services, and non-recurring revenue. ARR is the North Star metric for SaaS companies and investors. It drives valuation (via ARR multiples), determines fundraising timing (milestones like $1M, $5M, $10M ARR signal Series A/B readiness), and is used to calculate growth rate, NRR, and burn multiple.
Worked Example
A SaaS company has 200 customers paying $500/month on average. MRR = $100,000. ARR = $100,000 × 12 = $1,200,000 ($1.2M ARR). The company closes a $50,000/year annual contract — this adds $50,000 to ARR directly. ARR grows or shrinks with new sales, expansions, contractions, and churn.
Why ARR Matters
ARR is the headline metric investors use to benchmark SaaS companies. The jump from $1M to $3M ARR signals you've found product-market fit. $5M ARR is the minimum for most Series A leads; $10M+ opens the door to top-tier Series B firms. ARR growth rate (year-over-year) is equally important — tripling ARR annually is the T2D3 benchmark that signals breakout growth.
Related Terms
Frequently Asked Questions
How do you calculate ARR?
ARR is calculated using the formula: ARR = MRR x 12. Annual Recurring Revenue — the annualized value of a company's subscription or contract revenue. The primary revenue metric for SaaS and subscription businesses, used to benchmark growth, valuation, and fundraising.
What is a good ARR?
What constitutes a "good" ARR depends on context — the fund's stage, vintage year, and strategy. Check our benchmarks and calculators for specific ranges.