eCommerce Glossary
This e-commerce glossary features over 250 essential terms every online seller should know to succeed in digital commerce.
What is Annual Recurring Revenue (ARR)?
Annual Recurring Revenue (ARR) is a metric that shows the amount of money a contracted subscription is generating during a one-year period.
How Does it Work?
Annual Recurring Revenue (ARR) is an essential metric for subscription-based businesses, providing insights into the annualized revenue generated from recurring subscriptions. It helps businesses understand their revenue stability and growth potential over time.
How to Calculate Annual Recurring Revenue (ARR)
To calculate it, follow these steps:
- Identify Monthly Recurring Revenue (MRR):
Determine the total recurring revenue generated by all active subscriptions in a month. This includes subscription fees, add-ons, and upgrades. - Multiply by 12:
Multiply the Monthly Recurring Revenue (MRR) by 12 to annualize the revenue and calculate the ARR.
ARR=Monthly Recurring Revenue (MRR)×12
Example Calculation
Let’s consider a subscription-based business with a Monthly Recurring Revenue (MRR) of $10,000.
ARR=10,000×12=$120,000
In this example, the Annual Recurring Revenue (ARR) is $120,000.
Importance of ARR
- Revenue Forecasting:
ARR provides a predictable and reliable measure of future revenue, allowing businesses to forecast financial performance more accurately. - Business Valuation:
ARR is a key factor in determining the value of a subscription-based business, influencing investment decisions and potential acquisitions. - Growth Tracking:
Monitoring changes in ARR over time helps businesses assess their growth trajectory and evaluate the effectiveness of their strategies. - Performance Measurement:
ARR serves as a performance metric for subscription businesses, indicating the success of customer acquisition, retention, and monetization efforts.
In summary, ARR is a critical metric for subscription-based businesses, reflecting the annualized revenue generated from recurring subscriptions. Calculating ARR involves multiplying Monthly Recurring Revenue (MRR) by 12. By tracking ARR, businesses can gain insights into their revenue stability, growth potential, and overall financial health.