ARR (Annual Recurring Revenue)
ARR is the yearly value of recurring subscription revenue. It's MRR × 12, normalized to show annual run rate. SaaS investors care about ARR more than MRR at scale.
What is ARR (Annual Recurring Revenue)?
ARR = MRR × 12. If you have $50k MRR, your ARR is $600k. Simple.
Why ARR matters: Once you're past early stage, investors and acquirers talk in ARR, not MRR. A $10M ARR company is worth $50-100M+ depending on growth rate and margins. ARR is the standard metric for valuation.
ARR vs. MRR: MRR is better for tracking month-to-month changes. ARR is better for annual planning, fundraising, and valuation. Both measure the same thing at different time scales.
Annual contracts boost ARR: If customers pay annually upfront, you recognize 1/12 each month for MRR, but the full amount for ARR calculation. Annual deals improve cash flow and retention (harder to churn mid-contract).
Net ARR retention: The holy grail metric for SaaS. If you start the year with $1M ARR, lose $100k to churn, but gain $200k from expansions, you end with $1.1M from the same cohort. That's 110% net retention. Above 100% means you grow even without new customers.
ARR growth benchmarks: Seed stage: 3-5x year-over-year growth. Series A: 2-3x. Series B+: 1.5-2x. Below these, you're not growing fast enough for VC funding (but might be great for bootstrapping).
Common mistakes: (1) Including one-time fees in ARR (setup fees aren't recurring), (2) Not normalizing multi-year contracts (a 3-year $300k deal = $100k ARR, not $300k), (3) Confusing bookings with ARR (a signed contract isn't ARR until it starts).
Examples
If you have 100 customers at $500/month, your ARR is $600k. If 20 customers upgrade to $1,000/month during the year, your ending ARR is $840k—40% growth.