Annualized Run Rate (ARR) projects how much recurring revenue a business can earn in a year. It is calculated using current recurring income and assumes that the same level of revenue continues consistently throughout the next twelve months. This figure helps subscription-based companies monitor growth and evaluate revenue trends over time.
Step 1: Identify your Monthly Recurring Revenue (MRR) from active subscriptions. This should include only consistent, subscription-based income. Exclude any one-time charges, professional service fees, or variable usage billing.
Step 2: Make sure the revenue is stable and recurring. For annual contracts, divide the total contract value by 12 to get the monthly equivalent.
Step 3: Multiply your verified MRR by 12 to estimate your annualized recurring revenue.
ARR = MRR × 12
Step 4: Validate the results. If your MRR changes frequently, consider using an average of the past 3–6 months for a more accurate projection.
ARR = Monthly Recurring Revenue (MRR) × 12
Note: Some companies calculate ARR based on actual contract values instead of monthly rates, especially in enterprise sales with annual billing cycles.
In the SaaS industry, ARR growth is a key indicator of business momentum. A year-over-year ARR growth rate of 40% or more is often seen as strong, especially for companies beyond the startup phase. Early-stage businesses may aim for even faster growth to attract investor interest and validate product-market fit.
While there is no fixed standard, healthy ARR growth typically reflects a combination of steady customer acquisition, strong retention, and potential revenue expansion from existing accounts.
The total recurring income generated from subscriptions each month, used to calculate ARR.
The projected revenue a business expects from a customer throughout the entire subscription relationship.
The rate at which customers cancel their subscriptions, directly impacting ARR growth or decline.
The average cost of acquiring a new customer, which influences how efficiently ARR can be scaled.
Net Revenue Retention (NRR):
A metric that reflects revenue changes from existing customers, including expansions, contractions, and churn.
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ARR allows companies to understand their long-term earning potential from subscriptions and serves as a foundation for strategic planning, investor reporting, and company valuation.
No. ARR includes only recurring subscription revenue. It does not account for one-time services, transactional sales, or variable charges.
MRR provides a short-term view of recurring revenue each month, while ARR stretches that snapshot across an entire year for long-term analysis.
ARR reflects the current run rate and assumes no changes in customer behavior. For more accurate projections, companies often monitor Net ARR or Net Revenue Retention separately.