What is Annual Recurring Revenue (ARR)?
ARR is the annualized value of a company's contracted subscription revenue. It equals MRR multiplied by 12 and is the standard valuation metric for SaaS and subscription businesses. ARR excludes one-time fees, setup charges, and variable usage revenue — only predictable, contracted revenue counts.
What is the difference between ARR and revenue?
ARR is a forward-looking metric representing the annual run rate of contracted subscriptions. Total revenue (from financial statements) includes all actual cash received in a period, including one-time fees, professional services, and usage charges. ARR is always higher than reported revenue for early-stage companies acquiring customers faster than their annual base.
How do investors use ARR?
ARR is the primary input for SaaS valuation. Investors typically apply an ARR multiple to determine enterprise value. High-growth SaaS companies (50%+ YoY growth) may trade at 10-20x ARR; mature SaaS at 4-8x ARR. ARR growth rate, net revenue retention, and gross margin significantly influence the multiple.
What is a good ARR growth rate?
The Rule of 40 is a common benchmark: ARR growth rate % + profit margin % should equal 40 or above. Early-stage companies ($1M-$5M ARR) are typically expected to grow 100%+ annually. At $10M ARR, 80%+ is strong. At $50M+, 40-60% is excellent. Growth naturally slows as ARR scales.