Annual recurring revenue, or ARR, is a measure of the value of a customer contract or subscription based on recurring payments normalized to a one year term. The following are illustrative examples.A customer subscribes to a service that can be canceled at any time with a monthly cost of $800. Annual recurring revenue is simply 12 times the monthly recurring revenue.
|ARR || = MRR × 12|
| = $800 × 12|
| = $9600|
Irregular PaymentsA customer signs a contract for $13 million for the construction of a building that will take two years to construct. Payments are made irregularly based on project milestones. Irregular payments such as this are often often not considered recurring revenue. It is common to use annual contract value or annual run rate to measure revenue in industries where irregular payments are common. However, in some cases a firm views annual recurring revenue as any revenue that is predictable such that it can be calculated from irregular payments as follows.
|ARR ||= total predictable payments / contract length|
|= $13 million / 2|
|= $6.5 million|
Non-standard Contract LengthAnnual recurring revenue is normalized to one year. For example, a contract that spans 32 months worth $1000 can be calculated as follows.
|ARR ||= (total revenue / contract months) × 12|
|= ($1000 / 32) × 12|
One-time FeesOne-time fees are excluded from annual recurring revenue. For example, a customer who pays a $900 set up fee followed by $100 monthly payments represents an ARR of:
Similar metrics such as annual contract value and annual run rate do include one-time payments.
|ARR ||= monthly payments × 12|
|= $100 × 12|
Average For All CustomersAnnual recurring revenue can be calculated as an average for all customers by determining what revenue is recurring, normalizing it to an annual rate and dividing by all customers. This may be based on trailing revenue or a forward estimate based on signed contracts. For example, a software as a service firm that has annual subscription revenues of $12 million and 50,000 customers.
|ARR ||= recurring revenue / number of customers|
|= $12 million / 50,000|
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