Annual Recurring Revenue (ARR) is a metric used in subscription and billing management to measure the annualized revenue generated from recurring subscriptions or contracts. ARR provides a predictable revenue stream for the business and is a key metric used to evaluate the health of a subscription-based business.
ARR is calculated by multiplying the total number of subscribers by the average subscription price and the number of subscription periods per year. For example, if a business has 1,000 subscribers paying an average of $100 per month for a 12-month subscription, the ARR would be $1.2 million ($100 x 12 x 1,000).
ARR is a useful metric for subscription businesses as it provides a clear view of future revenue streams and helps to measure the effectiveness of pricing and promotional strategies. By tracking ARR, businesses can assess whether their customer acquisition efforts are generating a predictable stream of revenue.
It also helps businesses to forecast their future revenue and plan accordingly. By projecting the growth of the subscriber base and the average revenue per subscriber, businesses can determine the resources needed to support future growth.