ARR is a metric that represents the amount of revenue a SaaS company can expect to receive from its customers on a recurring basis in a given year. It's a measure of the predictable and recurring revenue from existing customers and any new customers acquired during the year. ARR reflects the recurring portion of the company's revenue, which is often seen as more reliable and predictable than one-time sales.
Why ARR Is Important
ARR is a crucial metric for SaaS companies for several reasons:
By looking at ARR, companies can easily see the amount of revenue they can expect to receive in a year. This helps to provide a clear picture of their revenue performance and growth potential.
ARR helps companies make informed predictions about future revenue, which is crucial for planning and budgeting.
By tracking ARR over time, companies can see if their revenue is growing or declining, which helps them understand the impact of their business decisions and make changes as needed.
ARR is a key factor in determining the valuation of a SaaS company. A higher ARR is typically associated with a higher valuation.
How to Calculate ARR
To calculate ARR, first determine the average monthly recurring revenue (MRR) from all customers. Next multiply the MRR by 12 to get the ARR.
ARR = Monthly Recurring Revenue * 12
Consider factoring in new customers and subtracting churned customers to get the updated ARR forecast for the current year.
