Annual Recurring Revenue
Annual recurring revenue annualises the monthly recurring revenue of a subscription business.
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Example
$15,000 MRR: ARR = $180,000
How it works
Annual Recurring Revenue (ARR) converts a business’s predictable monthly subscription income into a yearly figure. Since there are 12 months in a year, multiplying Monthly Recurring Revenue by 12 gives the amount the business would earn in a full year if that monthly level stayed the same. This is useful because it puts subscription revenue into a longer-term context and makes it easier to compare performance over time.
When to use it
Use this formula for subscription-based businesses that bill monthly and want to estimate their yearly recurring revenue. It is especially helpful for sales reporting, forecasting, and comparing month-to-month growth in a consistent annual format.
Worked example, step by step
A software company has MRR of $8,750. ARR = MRR × 12 ARR = $8,750 × 12 ARR = $105,000 So the company’s annual recurring revenue is $105,000.
Common mistakes to avoid
- Using total revenue instead of recurring monthly revenue
- Multiplying one-time sales or setup fees by 12
- Forgetting that ARR assumes the MRR stays constant for the full year
Did You Know?
ARR is the headline number in SaaS valuations — companies are often priced at a multiple of it.
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