Annual Recurring Revenue (ARR) is a key performance indicator used by companies with a subscription-based business model, particularly in the Software as a Service (SaaS) industry. ARR is the total revenue that a company expects to receive from its customers over the course of a year based on their current subscriptions. It is used interchangeably with Monthly Recurring Revenue (MRR).
Annual Recurring Revenue is calculated by multiplying the monthly recurring Revenue (MRR) by 12. For example, if a company has 1,000 customers, each paying $200 monthly, the monthly recurring Revenue would be $200,000. The ARR for this company would be $2.4 million ($200,000 x 12).
ƒ Sum(Recurring Revenue irrespective of billing interval expressed as an annual value)
The benchmark for Annual Recurring Revenue (ARR) varies depending on the industry, business model, size, and company growth stage.
However, a $1 million ARR indicates that a small SaaS business is ready to scale. It is the starting point for a company that is looking to attract Series A VC. Early-stage SaaS companies have ARR between $1 million and $10 million, mid-sized ones have ARR between $10 million and $50 million, and those above $50 million are categorized ad late-stage SaaS companies.
Monthly Recurring Revenue
Average Revenue Per Account
Gross MRR Churn Rate
There isn't a perfect ARR multiple. This metric used for calculating the valuation of SaaS companies can vary based on the company's growth rate, market opportunity, customer base, profitability, and competition. However, most analysts consider 5x to 10x as the benchmark to ascertain a healthy and growing business.
ARR can be higher than total revenue for a given period as it measures a company's expected annual revenue from recurring sources, such as subscriptions. In contrast, total revenue includes all sources of income, including one-time sales, services, and non-recurring items.
The Rule of 40 is a financial performance benchmark used to evaluate the balance between a company's growth rate and profitability. Under this rule, a software company's growth rate and profitability should be at least 40%. It uses the formula - Growth rate + Profitability = 40%