What Exactly is Annual Recurring Revenue (ARR)?
Everything you need to know about ARR and why it's important.
The Ins and Outs of ARR
I have seen quite a few pitch decks lately where entrepreneurs describe all revenue as ARR (annual recurring revenue). Here are a few thoughts on what it is/is not and why ARR is important.
What is ARR
Simply, annual recurring revenue is the annual revenue paid by a customer for a product or service in a recurring/subscription manner. Most software businesses have revenue that falls into this category where the customer pays a monthly or annual subscription that automatically renews.
What ARR is not
ARR is not any revenue you have ever received in the life of the business. It is not any revenue you received last year. It is not a one-time revenue payment for a product or service. A twelve month contract that does not auto-renew is not ARR. LOIs (letters-of-intent) or pipeline deals that are about to close do not count towards ARR. Be careful claiming ARR in a pitch deck when you don’t have true ARR.
Why is ARR important
For software businesses, ARR provides a great way to show a strong core business and ability to scale up. Without recurring revenue, that can mean a lot of sales/service efforts just to keep the same revenue as the previous year. With subscription revenue, you can also benefit from high net dollar retention that combines low churn and expansion within existing customers (i.e. more seats/more products).