In SaaS, growth isn’t measured by one-time deals — it’s measured by predictable, recurring revenue. That’s why Annual Recurring Revenue (ARR) has become one of the most important metrics for founders, finance teams, and investors.
ARR shows the steady, contracted revenue your business can count on each year. It filters out one-off projects and highlights the true health of your subscription model. Calculating it correctly gives you clarity on sustainability, helps in forecasting, and is a cornerstone of SaaS valuations.
In this guide, we’ll walk step by step through how to calculate ARR, what to include or exclude, and how to adjust for upgrades, downgrades, and churn so you can track your growth with confidence.
Why ARR Is the SaaS Growth Metric Investors Care About
For SaaS companies, predictable revenue is everything. That’s why Annual Recurring Revenue (ARR) is one of the first numbers investors, boards, and founders look at.
ARR highlights how much contracted recurring revenue your company will generate each year. It ignores one-off services and focuses on the steady revenue that drives valuation multiples, cash flow planning, and runway forecasts.
👉 Want to see your numbers instantly? Try the Annual Recurring Revenue Calculator.
Step 1: Understand the ARR Formula
At its simplest, ARR is calculated by multiplying Monthly Recurring Revenue (MRR) by 12.
ARR = MRR × 12
Example:
- If your MRR = $50,000
- ARR = $50,000 × 12 = $600,000
This formula works for SaaS businesses with consistent subscription billing.
Step 2: Include Only Recurring Revenue
ARR should reflect ongoing, predictable streams.
✅ Include:
- Monthly or annual subscription fees
- Seat-based or usage-based recurring charges
- Add-ons with recurring billing
❌ Exclude:
- One-time setup or onboarding fees
- Professional services
- Non-recurring consulting
👉 Use the Revenue Forecasting Calculator to separate recurring from non-recurring revenue.
Step 3: Factor in Expansion, Contraction, and Churn
ARR isn’t static. It moves with customer behavior:
- Expansion ARR → customers add more seats or upgrade plans
- Contraction ARR → customers downgrade to smaller plans
- Churn ARR → customers cancel contracts
The full formula looks like this:
ARR = (New ARR + Expansion ARR) – (Churn ARR + Contraction ARR)
👉 Model churn and expansion impact with the Churn Impact Calculator.
Step 4: Handle Multi-Year Contracts Correctly
For contracts longer than a year, annualize the total value.
Example:
- A 3-year contract worth $60,000
- ARR contribution = $60,000 ÷ 3 = $20,000 per year
This ensures ARR reflects predictable annual revenue, not inflated totals.
Step 5: Track ARR Growth by Cohorts
Looking at ARR as a single number can hide trends. Break it into cohorts:
- New ARR from fresh customers
- Expansion ARR from upgrades
- Lost ARR from churn
This helps you see whether growth is driven by acquisition or retention.
👉 Use the SaaS Runway Extension Calculator to see how ARR growth extends your cash runway.
Step 6: Use ARR for Decision-Making and Valuation
ARR connects directly to SaaS valuation multiples. High-growth companies are often valued at 5×–10× ARR, depending on efficiency and retention.
Key benchmarks investors look for:
- ARR growth 2×–3× year-over-year in early stages
- Net Revenue Retention (NRR) > 100% at scale
- Alignment with the Rule of 40 (growth + profit margin ≥ 40%)
FAQs on ARR for SaaS
What’s the difference between ARR and MRR?
MRR shows monthly recurring revenue; ARR annualizes it for long-term planning.
Should I include churned customers in ARR?
No. ARR only includes active, paying contracts.
Do annual contracts count in ARR?
Yes. Convert the annual contract value into a yearly figure.
Can ARR be negative?
If churn and contraction exceed new and expansion ARR, net ARR growth can be negative.
Why is ARR important for fundraising?
Because it demonstrates stable, recurring revenue streams that investors trust.