Definition: Metric representing the annualized recurring revenue of a subscription business, used to evaluate the scale and growth trajectory of SaaS companies.
— Source: NERVICO, Product Development Consultancy
What is ARR
ARR (Annual Recurring Revenue) is the metric that annualizes the recurring revenue of a subscription business. It is calculated by multiplying MRR (Monthly Recurring Revenue) by 12. If a company has 50,000 euros MRR, its ARR is 600,000 euros. Like MRR, ARR excludes non-recurring revenue. It is the most widely used metric by investors and analysts to evaluate the scale and growth trajectory of SaaS companies.
How it works
ARR is calculated from current MRR: ARR = MRR x 12. It can also be calculated by summing the annualized value of all active contracts. ARR components mirror those of MRR at annual scale: new ARR (new contracts), expansion ARR (upgrades and add-ons), contraction ARR (downgrades), and churned ARR (cancellations). The net new ARR for a period indicates how much recurring revenue grew in annualized terms.
Why it matters
ARR is the common language among SaaS companies, investors, and the market. ARR milestones (1M, 5M, 10M, 100M) serve as benchmarks for valuations, funding rounds, and strategic decisions. Year-over-year ARR growth rate is one of the most watched indicators: growing 100% YoY (doubling ARR every year) is considered top-tier pace for growth-stage startups. The “Rule of 40” combines ARR growth rate with profit margin as an efficiency indicator.
Practical example
A SaaS startup closes its second year with 1.2 million euros ARR (100,000 euros MRR). During the third year, it adds 80,000 euros of net new ARR per quarter from new customers and account expansion. By the end of year three, ARR reaches 1.52 million euros, a 27% growth. Investors value the company at an 8x ARR multiple for its Series A round, resulting in a 12.16 million euro valuation.