Annual Recurring Revenue (ARR) is a SaaS sales metric used by a subscription-based business model that shows the overall revenue that comes in every year for the life of a subscription (or contract).
More specifically, ARR is the value of the recurring revenue coming in from a business’s subscriptions over one calendar year.
The ARR formula is: ARR = (Overall Subscription Paid Per Year + Recurring Revenue From Add-ons or Upgrades) – Revenue Lost from Cancellations. It tells you the predictable revenue for a 12-month period.
Understanding this metric will help you understand how much money your company makes (and could make) annually. It will also provide insight into the sustainability of your business, as well as how much it can grow.