What is ARR (Annual Recurring Revenue)? Complete Guide

Detailed Explanation

Annual Recurring Revenue (ARR) is the North Star metric for SaaS and subscription businesses. It represents predictable, recurring revenue that you can count on year after year, as opposed to one-time sales. ARR only includes recurring subscription revenue—it excludes one-time fees, professional services, or usage-based overages (unless they're predictable). The beauty of ARR is predictability: if you have $1M ARR with 90% retention, you know you'll have at least $900K next year even with zero new sales. This predictability makes SaaS businesses highly valuable to investors (8-12x ARR valuations for strong companies). ARR growth rate is often more important than absolute ARR—investors want to see 100%+ year-over-year growth in early stages, 40-60% in growth stage.

Real-World Examples

Freshworks

Hit $100M ARR in 2018 after 8 years. Grew to $400M+ ARR by 2021 (before IPO). Their ARR growth was consistent 40-60% YoY, demonstrating strong product-market fit and expansion revenue from existing customers.

Zoho

Bootstrapped to $1B+ ARR over 20 years with 45+ products. Never raised venture funding. Their ARR comes from 80M+ users worldwide, with India being a key market. Proves you can build massive ARR without VC money.

Razorpay

Not pure SaaS but has subscription ARR from payment processing fees. Crossed $100M+ ARR by 2021. Their "recurring" revenue comes from merchants processing monthly, making it highly predictable like traditional ARR.

Why It Matters for Your Startup

ARR determines your company's valuation (SaaS companies trade at 5-15x ARR), your ability to raise funding (VCs want to see $1M+ ARR before Series A), and your business sustainability. High ARR with strong retention means you can plan for the future, hire confidently, and invest in long-term bets. ARR also signals product-market fit—if customers are willing to commit to annual contracts, they believe in your product. For founders, hitting key ARR milestones ($1M, $10M, $100M) unlocks new opportunities for funding, partnerships, and exits.

Common Mistakes

❌Including one-time revenue in ARR—professional services, setup fees, and custom dev don't count

❌Not adjusting for churn—gross ARR looks good, but net ARR (after churn) is what matters

❌Confusing ARR with revenue—ARR is the run rate, actual revenue in year 1 might be lower due to monthly billing

❌Ignoring expansion vs. new ARR—$1M new ARR is great, but $1M from expanding existing customers is better (lower CAC)

❌Celebrating vanity ARR—annual prepay customers who churn after year 1 inflate ARR without real retention

❌Not tracking ARR per customer—increasing from $5K to $10K ARR per customer is as important as doubling customer count

Frequently Asked Questions

What's a good ARR growth rate?

Seed stage (<$1M ARR): 200-300% YoY. Series A ($1-5M ARR): 100-200% YoY. Series B ($10M+ ARR): 60-100% YoY. Public companies (>$100M ARR): 30-50% YoY. Anything above these benchmarks is exceptional.

How much ARR do I need to raise a Series A?

Benchmark is $1-3M ARR with 100%+ YoY growth. Top VCs want to see $2M+ ARR growing 150%+ YoY. But some companies raise earlier ($500K ARR) if they have exceptional growth rate (300%+ YoY) or are in hot markets (AI, fintech).

Should I offer annual or monthly pricing?

Offer both, but incentivize annual (10-20% discount). Annual contracts improve cash flow, reduce churn (harder to cancel), and increase ARR. But monthly pricing lowers barrier to entry and helps with initial acquisition. Use monthly to acquire, annual to retain.

Can I have ARR if I'm not SaaS?

Yes, if you have predictable recurring revenue. E-commerce subscriptions (Dollar Shave Club), marketplaces with subscription sellers (Shopify), recurring services (managed hosting), and usage-based billing with predictable patterns all can calculate ARR.

ARR (Annual Recurring Revenue)

Quick Definition