Annual Recurring Revenue (ARR)

Annual recurring revenue is the metric that defines the scale of a subscription business. When a SaaS company says it has "$10M ARR," it means its current subscriptions generate $10 million per year if nothing changes. ARR is simply MRR multiplied by 12, providing a more intuitive sense of business size than a monthly figure.

ARR is the primary metric used in SaaS valuations. Venture-backed companies are often valued at multiples of ARR, ranging from 5x for slow-growing companies to 30x+ for hypergrowth companies with strong retention. Public SaaS companies are also frequently evaluated on ARR growth rates and ARR per employee as efficiency metrics.

For ARR to be meaningful, the underlying revenue must be truly recurring, meaning customers have committed to ongoing payments and the churn rate is well-understood. One-time fees, setup charges, and professional services revenue should not be included in ARR even though they contribute to total revenue. The purity of the ARR number determines its usefulness as a planning and valuation tool.