Live Webinar: Secrets to Building a Successful B2B2C Growth Flywheel
Save your spot now

Annual Recurring Revenue

Businesses, especially those in the software as a service (SaaS) industry, majorly count on Annual Recurring Revenue (ARR) for growth. ARR mainly refers to the amount of predictable revenue expected to count in annually. It is analyzed as one of the critical business metrics as it helps investors predict future revenue streams.

What is annual recurring revenue?

Annual recurring revenue (ARR) is a critical financial metric used primarily for businesses to measure attainable revenue and forecasting revenue that may be generated over 12 months.

Annual Recurring Revenue is considered as a primary metric to measure year-over-year growth of SaaS and subscription companies using a recurring revenue model.ARR is also represented as the Monthly Recurring Revenue (MRR).

Boost Sales Performance by 94% with Our Gamified Commission Management Software  

How to calculate annual recurring revenue?

To calculate Annual Recurring Revenue, monthly recurring revenue is required.

To calculate it step wise as follows:

  1. Determine MRR
  2. Determining Average Monthly Recurring Revenue
  3. Multiplying the Average Monthly Recurring Revenue by 12

Step 1: Determine MRR

Adding the revenue generated by active subscription within 30 days(a month)

Which, however, includes the revenue on a monthly basis.

Step 2: Determining Average Monthly Recurring Revenue

If MRR is seen fluctuating during a whole year, calculation of average MRR is required by summing up the MRR every month and diving the calculated number of month

Step 3: Multiplying the Average Monthly Recurring Revenue by 12:

After the average MRR, multiply it by 12 to retrieve ARR.

To show it mathematically:

Annual Recurring Revenue = ( Total amount of monthly subscriptions per month + Total amount gained from new customers per month + total amount earned for upgrades and add-ons per month - total amount lost from downgrades in a month - Total amount lost from churn) X 12

Annual recurring revenue vs. revenue: what is the difference?

The difference between Annual Recurring Revenue and revenue is as follows

ARR accounts for subscription-based revenue, whereas total revenue accounts for each amount the business caters to, irrespective of where it comes from.

The second difference between the two is that the former is an essential aspect for SaaS companies, and subscription, on the other hand, total revenue, should be distinct from these aspects.

What is an example of annual recurring revenue?

Let's say there is a software-as-a-service (SaaS) company called "Company X" that provides a cloud-based project management tool. They offer different subscription plans to their customers, ranging from basic to premium features.

Suppose Company X has 1,000 customers who are subscribed to their premium plan, which costs $100 per month. Each customer pays on an annual basis, so they are billed $1,200 upfront for the year.

To calculate the annual recurring revenue (ARR) for CloudSolutions, you multiply the number of customers by the annual subscription price.

In this case, it would be:

ARR = Number of customers * Annual subscription price

ARR = 1,000 customers * $1,200

ARR = $1,200,000

Therefore, Company X has an annual recurring revenue of $1,200,000. This represents the predictable, recurring revenue that the company can expect to receive on an annual basis from its subscription customers.

Do taxes count towards annual recurring revenue?

No, taxes majorly are not part of the annual recurring revenue calculation. However, it mainly focuses on the recurring revenue generated by the subscription contracts or the recurring revenue streaming over the 12 months.

Taxes are primarily separate from revenue gained from the company’s business activities.

How to forecast annual recurring revenue?

To forecast annual recurring revenue (ARR) in a concise manner, follow these steps:

Analyze historical data

  1. Define key metrics
  2. Conduct market analysis
  3. Set growth goals
  4. Use forecasting models
  5. Perform sensitivity analysis
  6. Refine and iterate

       1. Analyze historical data: Study past ARR data to identify patterns and trends.

       2. Define key metrics: Determine the metrics that impact ARR, such as customer acquisition, churn rate, and expansion revenue.

       3. Conduct market analysis: Assess market conditions, competition, and industry trends that affect ARR.

       4. Set growth goals: Establish realistic goals aligned with your business strategy and market analysis.

       5. Use forecasting models: Employ methods like time series analysis, cohort analysis, or growth drivers analysis to project ARR.

       6. Perform sensitivity analysis: Evaluate the impact of changing assumptions or market conditions on your forecast.

       7. Refine and iterate: Continuously review and update your forecast based on new data and feedback from various teams.

Employee pulse surveys:

These are short surveys that can be sent frequently to check what your employees think about an issue quickly. The survey comprises fewer questions (not more than 10) to get the information quickly. These can be administered at regular intervals (monthly/weekly/quarterly).

One-on-one meetings:

Having periodic, hour-long meetings for an informal chat with every team member is an excellent way to get a true sense of what’s happening with them. Since it is a safe and private conversation, it helps you get better details about an issue.


eNPS (employee Net Promoter score) is one of the simplest yet effective ways to assess your employee's opinion of your company. It includes one intriguing question that gauges loyalty. An example of eNPS questions include: How likely are you to recommend our company to others? Employees respond to the eNPS survey on a scale of 1-10, where 10 denotes they are ‘highly likely’ to recommend the company and 1 signifies they are ‘highly unlikely’ to recommend it.

Based on the responses, employees can be placed in three different categories:

  • Promoters
    Employees who have responded positively or agreed.
  • Detractors
    Employees who have reacted negatively or disagreed.
  • Passives
    Employees who have stayed neutral with their responses.

How to increase annual recurring revenue?

Businesses need to get critical metrics as it mainly helps investors predict future revenue streams. Practical strategies to implement to increase ARR are discussed below:

  1. Streamlining price strategies
  2. Encouraging market research
  3. Offering discounts and promotions
  4. Executing dynamic pricing solutions
  5. Developing solid sales and marketing
  6. Investing in the customer service team and infrastructure

1.  Streamlining price strategies: Setting up accurate price strategies can be difficult for any    business. Yet, it is seen as a most critical component in boosting Annual Recurring Revenue.

2.  Encouraging market research: One of the finest ways for any business to set pricing strategies that generate revenue is to conduct effective market research. This could help the companies perceive their competitor's charging policies for similar products or services.

3. Offering discounts and promotions: Discounts and promotions can be used to incentivize customers to buy more or pay for products or services for a more extended period in advance. In such a way, businesses can increase their ARR and ensure loyalty toward their customers.

4. Executing dynamic pricing solutions: Dynamic pricing solutions allow businesses to optimize their pricing using algorithms that carry into account market demand and competitors' pricing. This gives an edge over other companies by providing value to their customers while increasing their ARR.

5. Developing solid sales and marketing: A strong sales and marketing strategy can help boost ARR by effectively reaching out to potential customers.

6. Investing in customer service teams and infrastructure: Allocating resources to enhance better customer service capabilities can make a large difference in customer experience. Training the customer service team and implementing various tools to solve customer problems can help reduce churn and retain customers.

Similar Blogs

Quick Links