ARR (annual recurring revenue)

What is ARR?

ARR, or annual recurring revenue, is the yearly value of all the subscriptions you have active right now. It counts what customers pay every year to keep using your product. It leaves out one-off money like setup fees, onboarding packages, training and consulting hours.

Let's say you sell project management software to agencies. You have 400 customers on annual contracts, and each one pays $12,000 a year. That's $4.8M in ARR. If a new customer also pays a $3,000 onboarding fee, your revenue for the year goes up by $3,000. Your ARR stays the same, because that fee won't come back next year.

Monthly plans count too. Multiply your MRR by 12 and you get ARR. Teams that sell monthly plans to small companies tend to report MRR. Teams that sell annual contracts to bigger companies tend to report ARR.

Why ARR matters for B2B SaaS

ARR is the number your CEO, your board and your investors look at first. Hiring plans, sales targets and fundraising usually start from it. Investors often value SaaS companies as a multiple of ARR, so a dollar of new recurring revenue is worth far more to the business than a dollar of one-off fees.

That's why I tell marketing teams to report in ARR as early as they can. A slide full of traffic and MQLs gets a polite nod in a board meeting. A slide that says content sourced $400K of new ARR this year gets a bigger budget.

Here's what ARR tells you that other numbers can't:

• Where growth comes from: ARR moves for four reasons: new customers, expansion, contraction and churn. Splitting it that way shows whether you grow by winning new logos or by selling more to the ones you already have.
• Whether spend pays off: Efficiency metrics like CAC payback and the new CAC ratio divide sales and marketing spend by new ARR. If your ARR number is messy, every one of those metrics is messy too.
• What marketing is worth: When your CRM ties each closed deal to its first source, you can show the ARR that SEO, events or LinkedIn helped win. That's the language finance already speaks.

How to calculate ARR

The math is simple. The hard part is agreeing on what counts. Here's how I'd set it up:

• Start from contracts: Add up the yearly subscription value of every active contract. For monthly plans, take this month's recurring charges and multiply them by 12.
• Leave out one-off fees: Setup, onboarding, training and professional services don't repeat, so keep them out. Put them on a separate services line so nobody has to guess.
• Write a rule for usage: If part of your price depends on usage, like API calls or extra seats added mid-year, decide how to count it. Many teams count only the committed minimum, and some add a three-month average on top. Pick one rule and keep it.
• Use the price customers really pay: A customer who signed at 20% off list adds the discounted amount. Counting list price makes ARR look bigger than the cash that will arrive.
• Agree on dates with finance: Decide whether a deal counts from the day it's signed or the day the subscription starts. Use the same rule your finance team uses, or your numbers will never match theirs.
• Keep an ARR bridge: Every month, log starting ARR, then new, expansion, contraction and churn, then ending ARR. The bridge shows the story behind the total.

An ARR example

We've worked with B2B software brands like Katalon, Arrowsterr and Omniscient. Katalon is a test automation platform, the niche I used to work in. Its ARR grew 4x, and 80%+ of that ARR growth came from SEO. That's the kind of sentence that ties content work to the number a board cares about most. The Katalon case study covers how the work was done.

Now, here's what one quarter's ARR bridge could look like at a hypothetical HR software company:

Net new ARR for the quarter is $540,000. Look at the middle rows, though. Contraction and churn took back $210,000, exactly what expansion added. So in this example, keeping customers is worth as much to growth as the whole expansion effort, and the board should see both lines.

How to measure ARR

ARR lives in your billing system, like Stripe or Chargebee, and your CRM explains where it came from. Here's what I'd report:

• Net new ARR: New plus expansion, minus contraction and churn, for each month or quarter. Show it next to the bridge so the total never hides the parts.
• New ARR by source: Tag each closed-won opportunity with its original source and the answer the buyer gave on your demo form. Then add up new ARR by channel every quarter.
• ARR growth rate: Compare ending ARR with the same month last year. Year-over-year growth smooths out months when a few big renewals happen to land.
• NRR: Take the ARR from customers you had a year ago and compare it with what those same customers pay now. NRR above 100% means your base grows even before you sign anyone new.

Our B2B SaaS metrics guide has the formulas for these next to the other revenue metrics.

Common ARR mistakes

• Counting bookings as ARR: A three-year contract signed today adds one year of subscription value to ARR. The other two years are bookings, and they belong in a different report.
• Mixing in services: Onboarding and training fees make ARR look bigger for one year, then disappear. Keep them on their own line.
• Counting deals that haven't started: Some teams track signed contracts that start next quarter as contracted ARR, or CARR. That's a fair number to watch, so give it its own row next to live ARR.
• Reporting marketing in leads only: If your reports stop at MQLs, finance can't connect your work to ARR. Copy the source onto every opportunity so you can follow it all the way to closed revenue.
• Hiding churn in the story: A big quarter of new ARR can cover up a leaky base. Show the whole bridge every time.

Here's a quick test. Can you say how much of last year's new ARR started with a marketing channel? If you can't, the source field on your opportunities is the place to start this week.