Annual Recurring Revenue (ARR) is the total amount of predictable subscription revenue a SaaS company expects to generate over a 12-month period. While MRR tracks monthly momentum, ARR helps sales teams zoom out and understand long-term revenue health, strategic accounts, and the overall contribution of annual contracts. For many enterprise sales motions, ARR is the primary number tied to quota, compensation, and long-term growth plans.
What is Annual Recurring Revenue (ARR)?
ARR is the annualized value of all active subscription contracts. It includes revenue from new customers, renewals, and expansions — but excludes one-time fees, professional services, and usage-based revenue unless it’s recurring. Basic Formula: ARR = Σ (Contracted recurring revenue per customer × 12 months) Or, if you already calculate MRR: ARR = MRR × 12 ARR gives a standardized, forward-looking view of your subscription business across the entire year — making it ideal for strategic planning, sales goal-setting, and forecasting. Why It Matters in B2B SaaS
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It’s the strategic version of MRR. ARR helps sales teams understand long-term deal value, not just this month’s contribution.
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It’s how most enterprise deals are quoted and tracked. Especially for AEs selling to mid-market or enterprise, ARR aligns better with how customers negotiate budgets and contract terms.
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It sets the foundation for annual quotas and territory plans. ARR is commonly used in comp plans, rep scorecards, and sales forecasts.
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It’s a must-have metric in boardrooms and investor decks. Growth in ARR is a key indicator of business momentum — especially when segmented by new, expansion, and churn.
How to Measure ARR
Step 1: Identify all active, recurring contracts — monthly and annual Step 2: Normalize each to a yearly value For monthly contracts, multiply by 12 For multi-year deals, use the annualized portion Step 3: Exclude one-time charges, usage overages (unless recurring), and services Step 4: Sum the annual contract value (ACV) across all customers
Best Practices
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Segment ARR by customer type or region to understand where growth is coming from
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Track ARR growth by rep, segment, and product line for better planning
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Use ARR to compare deal quality — a $10K logo vs. a $100K enterprise deal can have vastly different GTM implications
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Make sure ARR definitions are consistent across Sales, RevOps, and Finance
Final Thought
ARR gives your sales team a clear line of sight into the long-term value of every deal you close. It’s not just a finance number — it’s how you measure the impact of your pipeline on company growth. Whether you’re an SDR booking qualified meetings or an AE closing six-figure contracts, understanding ARR helps you think bigger and sell smarter.
Frequently asked questions
How is ARR different from MRR?
MRR looks at revenue in monthly increments. ARR zooms out to show annualized value. Use MRR for short-term velocity, ARR for strategic planning.
Should ARR include renewals?
Yes. Renewals contribute to your recurring revenue stream and help measure customer retention.
Is ARR used for comp plans?
Often, yes — especially in enterprise and mid-market sales motions. Many AE quotas are based on ARR contribution.
Should SDRs care about ARR?
Definitely. Higher-ARR accounts usually signal higher-value deals, longer cycles, and stronger ICP alignment.