What is Annual Recurring Revenue?
Annual Recurring Revenue (ARR) is the single most important metric for any subscription-based business (SaaS). It represents the value of the recurring revenue components of your term subscriptions normalized to a one-year period.
In simple terms: It is how much money you can expect to repeat every year, assuming no customers leave.
The Formula The calculation is straightforward, provided you track your Monthly Recurring Revenue (MRR) accurately:
Monthly Recurring Revenue (MRR) × 12 = ARR
What to Include (and What to Exclude) Founders often artificially inflate their ARR by including the wrong things. Investors will catch this during due diligence.
- INCLUDE: Subscription fees, recurring add-ons, and upgrades.
- EXCLUDE: One-time setup fees, installation charges, non-recurring consulting services.
Why is ARR so important? For traditional businesses, value is often based on "EBITDA" (profit). For high-growth SaaS startups, value is based on Revenue Multiples. Investors might value your company at "10x ARR" or "15x ARR."
- If your ARR is £100k, a 10x valuation is £1 million.
- If you increase ARR to £200k, your valuation jumps to £2 million.
This is why SaaS founders are obsessed with this metric—it directly correlates to the company's price tag.
Key Takeaway: ARR is the heartbeat of a SaaS company. It measures momentum and stability, stripping away the noise of one-off sales.
