What Is ARR? Annual Recurring Revenue Explained

Annual Recurring Revenue (ARR) is the annualized value of your subscription revenue - how much you'd earn in a year if every customer stayed and nothing changed. It's the metric most commonly used to describe the scale of a SaaS business, and the one investors and acquirers focus on when evaluating growth.

What Is ARR?

ARR is MRR multiplied by 12. It represents the predictable, recurring revenue your subscription business generates over a 12-month period, normalized to remove the noise of month-to-month fluctuations.

Where MRR is the metric you watch week to week to monitor momentum, ARR is the number you use to communicate scale - to your board, your investors, and the market.

🧒 Explained simply You know how MRR is your lemonade stand's reliable monthly income? ARR is just stepping back at the start of the year and asking: "If every customer keeps their subscription and nothing changes, how much will I make this whole year?" It's the same money - just zoomed out to the full year so it's easier to plan big things, like hiring a helper or opening a second stand.

ARR = MRR × 12

Or calculated directly:

ARR = Sum of all active subscription values normalized to annual

A customer on a $100/month plan contributes $1,200 to ARR. A customer on a $900/year plan contributes $900 to ARR.

ARR vs MRR: When to Use Each

Both metrics measure the same underlying reality - your subscription revenue - just at different time scales. Which one you use depends on context:

Situation	Use
Day-to-day growth monitoring	MRR
Investor reporting and fundraising	ARR
Annual planning and forecasting	ARR
Comparing to industry benchmarks	ARR
Diagnosing a churn spike	MRR
Communicating business scale	ARR

Early-stage companies (under $1M ARR) often default to MRR because the month-to-month signal is more useful at that scale. As businesses grow, ARR becomes the standard unit of conversation.

How to Calculate ARR Correctly

The calculation is simple, but there are common mistakes that make ARR unreliable:

Include only recurring revenue. One-time fees, setup charges, and professional services are not recurring and should not be included in ARR. Including them inflates the number and makes growth trends misleading.

Normalize all plans to annual. A monthly customer paying $100/month contributes $1,200/year. An annual customer paying $1,080/year (with a discount) contributes $1,080/year. Both normalize cleanly to ARR - the key is to use the annualized contract value, not the cash received in any given period.

Use contracted, not invoiced, value. ARR is a forward-looking metric. It represents what customers are committed to paying, not what's already been billed. If a customer signs a 2-year contract, their ARR contribution is their annual contract value, not the total deal size.

ARR Components

Just as MRR breaks into components, ARR does too:

New ARR - from newly acquired customers
Expansion ARR - from upsells and upgrades to existing customers
Churned ARR - from customers who cancelled
Contraction ARR - from downgrades
Net New ARR - the net change (New + Expansion − Churned − Contraction)

Net New ARR is one of the most important growth signals at scale. It tells you whether you're adding more annual value than you're losing - and how that balance is shifting over time.

Why ARR Matters

Valuation. SaaS companies are frequently valued as a multiple of ARR. At different growth rates and margin profiles, that multiple can range from 3x to 20x or more. ARR is the starting point for any acquisition or fundraising conversation.

Forecasting. ARR gives you a stable base for annual planning. If you're at $2M ARR growing at 80% year-over-year, you can model toward $3.6M ARR next year and plan hiring, infrastructure, and marketing spend accordingly.

Benchmarking. ARR is the standard unit for comparing SaaS businesses to industry benchmarks. Metrics like ARR per employee, ARR growth rate, and ARR-to-CAC ratio are all measured at the ARR level.

Investor communication. When you say "we're at $5M ARR," investors understand immediately where you are in your growth journey. It's a shared language that MRR, while equally important, doesn't quite replicate.

ARR Growth Rate

ARR growth rate measures how fast your annual recurring revenue is growing year-over-year:

ARR Growth Rate = (ARR End of Period − ARR Start of Period) ÷ ARR Start of Period × 100

For SaaS benchmarks:

Under $1M ARR: 100%+ growth is common
$1M–$10M ARR: 80–150% is strong
$10M–$50M ARR: 50–100% is strong
$50M+ ARR: 30–60% is strong

These are rough benchmarks. What matters more than hitting a specific number is understanding whether your growth rate is accelerating, holding steady, or decelerating - and why.

How to Improve ARR

The levers for improving ARR are the same as for MRR, but the frame is annual:

Reduce annual churn. Monthly churn of 3% compounds to roughly 31% annual churn - meaning nearly a third of your ARR base churns every year. Reducing monthly churn even slightly has an outsized impact on the ARR you retain year-over-year.

Expand existing accounts. Net Revenue Retention above 100% means your ARR grows even without adding a single new customer. Building expansion into your product - through usage limits, seat-based pricing, or add-ons - is the most capital-efficient way to grow ARR.

Close longer contracts. Annual and multi-year contracts improve ARR predictability, reduce churn risk, and often improve cash flow. Offering incentives (discounts, locked-in pricing) for annual commitments benefits both the customer and your ARR stability.

How to Track ARR

Chartsy calculates ARR from your Stripe or Paddle data automatically, normalizing monthly and annual plans into a consistent annual figure. You can ask:

"What is my current ARR?"
"Show ARR growth for the last 2 years"
"What's my net new ARR this quarter?"
"Show churned ARR by month"

Connect Stripe and track your ARR →

Frequently Asked Questions About ARR

What is ARR in SaaS? ARR stands for Annual Recurring Revenue. It's the annualized value of all active subscription revenue - calculated as MRR × 12. It's the standard metric for communicating the scale of a SaaS business to investors, boards, and the market.

How do you convert MRR to ARR? Multiply your current MRR by 12. If your MRR is $25,000, your ARR is $300,000. Both numbers represent the same subscription base - ARR just expresses it at an annual scale, which is more useful for planning and investor conversations.

What is a good ARR growth rate? It depends on your stage. Under $1M ARR, 100%+ year-over-year growth is strong. At $1M–$10M ARR, 80–150% is excellent. At $10M–$50M ARR, 50–100% is strong. As companies scale, growth rates naturally decelerate - what matters is whether the rate is sustainable given your unit economics.

How does ARR affect SaaS valuation? SaaS companies are typically valued as a multiple of ARR - often 5x to 15x or more depending on growth rate, retention, and margin profile. A faster-growing business with strong NRR commands a higher multiple. ARR is the anchor number in almost every SaaS fundraise or acquisition conversation.

What is the difference between ARR and revenue? ARR only includes predictable, recurring subscription revenue. Total revenue may also include one-time fees, professional services, and non-recurring payments. ARR is a forward-looking metric representing committed future revenue; total revenue is a backward-looking measure of what was actually billed.