How to Calculate ARR in SaaS (Annual Recurring Revenue Made Simple)

ByBenjamin

If you run a SaaS business, one of the first numbers you’ll hear from investors, partners, or advisors is ARR. Annual Recurring Revenue is the simplest way to measure how much predictable income your software generates each year.

But many founders get confused about what counts toward ARR and how to calculate it correctly. Let’s break it down step by step.

✅ What Is ARR in SaaS?

ARR (Annual Recurring Revenue) is the total subscription revenue your SaaS can expect to earn in a year.

  • It includes recurring subscription fees (monthly or annual plans).
  • It excludes one-time payments, setup fees, or consulting charges.

Think of ARR as the “heartbeat” of your SaaS — steady, recurring, and predictable.

✅ ARR Formula

The basic formula is:

ARR = MRR × 12

Where:

  • MRR (Monthly Recurring Revenue) = the total recurring revenue you earn in a single month.
  • Multiply it by 12 to project it across the year.

✅ Example: Calculating ARR

Let’s say:

  • You have 500 customers.
  • Each pays $40/month.

Your MRR = 500 × $40 = $20,000
Your ARR = $20,000 × 12 = $240,000

If 50 customers churn:

  • New MRR = 450 × $40 = $18,000
  • New ARR = $18,000 × 12 = $216,000

This shows how customer churn directly impacts ARR.

✅ Why ARR Matters for SaaS

ARR isn’t just a vanity metric. It’s essential for:

  • Revenue Forecasting – Predictable cash flow makes planning easier.
  • Investor Reporting – VCs and angel investors use ARR to value SaaS startups.
  • Growth Tracking – Compare ARR year over year to see if your business is scaling.
  • Retention Insights – Flat or declining ARR usually points to churn problems.

✅ Common Mistakes in ARR Calculation

Many SaaS companies overestimate ARR by:

  • Counting one-time implementation or setup fees.
  • Ignoring customer churn and downgrades.
  • Forgetting to include upgrades or expansion revenue.

Always focus on recurring income only for an accurate picture.

✅ ARR vs. MRR: What’s the Difference?

  • MRR (Monthly Recurring Revenue) shows short-term monthly performance.
  • ARR (Annual Recurring Revenue) zooms out to yearly projections.

Both are useful, but ARR is especially important for long-term growth and investor updates.

✅ Quick Tools to Make It Easy

Instead of crunching numbers manually, you can use a free ARR calculator tool. Just enter your customer count and subscription price, and the tool does the math for you.

✅ Final Takeaway

Calculating ARR is simple — ARR = MRR × 12 — but interpreting it is where the real value lies. Use ARR to measure predictable income, spot retention issues, and show investors your company’s growth potential.

Keep it accurate, update it monthly, and you’ll have one of the most reliable indicators of your SaaS health.