Annual Recurring Revenue (ARR) is a key performance indicator (KPI) used by businesses to measure the amount of recurring revenue they expect to receive from their customers in the upcoming year. ARR is typically used by Software as a Service (SaaS) and subscription-based companies to evaluate their growth and revenue potential.
ARR is calculated by multiplying the monthly recurring revenue (MRR) by 12. For example, if a company has 1,000 customers each paying $100 per month, their monthly recurring revenue would be $100,000. Multiplying this figure by 12 would give an ARR of $1.2 million.
ARR is an important metric for SaaS companies because it provides a predictable revenue stream that can be used to evaluate the health and growth potential of the business. Investors, in particular, may be interested in a company's ARR as an indication of its future profitability and ability to sustain growth.
ARR can also be used to calculate other important metrics such as customer lifetime value (LTV), customer acquisition cost (CAC), and churn rate. These metrics can provide insights into how much a company should be willing to spend on customer acquisition and retention, and help identify areas for improvement in the company's sales and marketing strategies.
Overall, ARR is a powerful tool for evaluating the health and growth potential of a SaaS or subscription-based business, and is essential for businesses looking to attract investment and sustain long-term growth.