Annual Recurring Revenue (ARR) is the yearly value of a subscription business's recurring revenue — the number you'd expect to collect over the next 12 months if no customers churned and no new ones signed up. It's the standard way SaaS and subscription businesses talk about scale, because it normalizes revenue across different billing periods (monthly, annual, multi-year) into one comparable figure.
The formula
If a company collects $50,000 in Monthly Recurring Revenue (MRR), its ARR is $600,000. For customers on annual contracts, ARR is simply the contract value itself — no need to divide and multiply by 12.
Why ARR matters more than one-time revenue
Investors, especially at seed through Series B, look at ARR growth rate as the primary health signal for a subscription business — because recurring revenue is predictable revenue. A company with $1M in ARR growing 100% year-over-year is a fundamentally different (and usually more valuable) business than one with $1M in one-time sales, even if both collected the same cash last year.
ARR vs. revenue on a P&L
ARR is not the same as revenue recognized on an income statement under standard accounting rules (which spreads a $12,000 annual contract across 12 months of recognized revenue). ARR is a forward-looking operating metric, not a GAAP figure — it's how the business talks to itself and to investors about run-rate scale.