How is Annual Recurring Revenue Calculated?
Annual recurring revenue for your business may be calculated in a few different ways, depending on the complexity of your pricing model and how your customer contracts are structured.
The most basic formula for calculating your company’s ARR is:
ARR =(Monthly Subscription Cost) (Number of Customers)(12 months)
Example 1: Simple ARR Calculation
You operate a B2B SaaS company with 87 subscribers, each paying a subscription fee of $224 per month. You may calculate the ARR of your business as:
ARR = ($224)(87 subscribers)(12 months) =$233,856
With this type of ARR calculation, you’re essentially calculating your monthly recurring revenue (MRR) and forecasting it over a 12-month period while assuming 100% customer retention and zero growth.
You can aim for a more conservative (but potentially more accurate) calculation of your long-term ARR by only including subscribers that are under contract for the foreseeable future:
ARR = (Monthly Sub Cost)(Subs on minimum 1 year contract) 12 months
Example 2: Simple ARR Calculation – Only Long-Term Subscribers
You operate a B2B SaaS company with 87 subscribers. Some 32 of your subscribers are on month-to-month contracts with a 30-day notice period for cancellation, while the remaining 55 are locked in to annual agreements. All subscribers pay a subscription fee of $224 per month. You may calculate the ARR of your business as:
ARR = ($224)(55 subscribers)(12 months) = $147,840
This ARR calculation comes with a higher degree of certainty because it only includes subscribers that are locked into long-term contracts, and whose revenue is therefore guaranteed to be collected.
One of the most common ways for B2B companies to keep track of ARR is by calculating MRR on a rolling monthly basis and multiplying by 12 to normalize the results on an annual basis.
This requires formulas for calculating monthly changes in MRR and converting MRR to ARR:
End of Month MRR= Start of Month MRR + New MRR from Customer Acquisition
+ New MRR from Customer Upgrades – Lost MRR from Customer Downgrades
-Lost MRR from Customer Churn12
ARR = (End of Month MRR)12 months
Example 3: Rolling Monthly ARR Calculation
You operate a B2B SaaS company whose MRR at the beginning of the month was $12,320. During the month, your sales team added 12 new subscribers on long-term contracts at $224 per month – a total of $2,688 MRR. You gained $375 in new MRR from customer upgrades, but lost $250 in MRR from customer downgrades. You also had two subscribers cancel, creating an MRR loss of $448 per month.
Your ARR at the end of the month can be calculated as:
End of Month MRR = ($12,320)+($2,688)+($375)-($250)-($448) =$14,685
ARR = ($14,685)(12) =$176,220