What is the difference between ARR and MRR?

MRR is monthly recurring revenue; ARR is annual recurring revenue. For most subscription businesses, ARR equals MRR multiplied by twelve. Companies with primarily monthly contracts tend to focus on MRR, while those with annual contracts emphasise ARR. Both represent the same underlying metric at different time scales.

Does ARR include usage-based revenue?

It depends on whether usage is contractually committed. Contracted minimum commitments count toward ARR. Variable usage above the minimum is typically excluded from ARR because it is not guaranteed to recur. Some companies report a blended metric that includes expected usage based on historical patterns, but purist definitions exclude non-committed revenue.

At what ARR level does a SaaS company become investable?

Seed-stage investors may invest pre-revenue or at very early ARR. Series A investors typically want to see $1-3 million in ARR with strong growth. These thresholds vary by market: African SaaS companies may attract investment at lower ARR levels if they demonstrate strong unit economics and a large addressable market.

SaaS & Subscription MetricsBeginner4 min read

What Is ARR (Annual Recurring Revenue)?

ARR is the annualised value of a company's recurring subscription revenue. Learn how to calculate it, what it includes, and why it matters.

Key Takeaways

ARR is the annualised value of all active recurring subscription contracts at a point in time.
It excludes one-time fees, professional services, and variable usage charges unless they are contractually committed.
ARR is the primary revenue metric used to value and benchmark subscription businesses.

What ARR represents

Annual recurring revenue is the total value of recurring subscription revenue normalised to a one-year period. It represents the run rate of your subscription business: if nothing changed, how much recurring revenue would you collect over the next twelve months? ARR is a snapshot metric, calculated at a specific point in time, and it changes as you add new customers, expand existing accounts, or lose revenue to churn and contraction.

Calculating ARR correctly

The simplest calculation multiplies your monthly recurring revenue by twelve. For companies with annual or multi-year contracts, annualise each contract and sum them. A customer paying $120,000 for a three-year deal contributes $40,000 to ARR. Exclude one-time implementation fees, professional services, and hardware revenue. Include only the subscription component that is contractually committed to recur. Inconsistent ARR definitions create problems with investors and acquirers, so document your methodology.

ARR components and movements

ARR changes through four movements: new business ARR from first-time customers, expansion ARR from existing customers upgrading or adding products, contraction ARR from customers downgrading, and churned ARR from customers cancelling. Tracking these components individually reveals the drivers of growth. A company adding $2 million in new ARR but losing $1.5 million to churn is in a very different position than one adding $1 million with only $200,000 in losses.

ARR as a valuation benchmark

SaaS companies are commonly valued as a multiple of ARR. The multiple varies by growth rate, retention, profitability, and market conditions, ranging from 5x to 30x or more for high-growth public companies. For African SaaS companies seeking international investment, ARR is the metric investors will focus on first. Presenting clean, accurately calculated ARR with detailed movement analysis demonstrates financial rigour and builds investor confidence in your business model.

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