How to Calculate ARR in SaaS and Why It Matters for Your Business

Bysoftwareexplain Joseph

Every SaaS founder, CFO, or growth leader eventually faces the same question: “What’s our ARR?” Annual Recurring Revenue (ARR) is more than a vanity metric—it’s the signal investors, executives, and teams use to measure stability, growth, and long-term health.

If you’re not sure how to calculate ARR, or you’re worried about mistakes in reporting, this guide will help you. We’ll cover the formulas, examples, and common pitfalls so you can track ARR with confidence.

What Is ARR in SaaS?

ARR (Annual Recurring Revenue) is the yearly value of your predictable subscription revenue. It’s calculated by annualizing your monthly recurring revenue (MRR), adjusted for churn, downgrades, and expansion.

👉 Use the Annual Recurring Revenue Calculator to get your number instantly.

How to Calculate ARR Step by Step

1. Start With MRR

Monthly Recurring Revenue is your foundation. Add up the recurring subscription revenue for one month.

Use the MRR Calculator to confirm your baseline.

2. Multiply by 12

The simplest formula:

ARR = MRR × 12

If your MRR is $50,000, your ARR is $600,000.

3. Adjust for Expansion and Contraction

  • Expansion revenue from upsells and cross-sells increases ARR.
  • Contraction from downgrades reduces ARR.

Check the Expansion Revenue Calculator to see how upgrades impact your forecast.

4. Account for Churn

If customers cancel, ARR drops. A 5% annual churn on $600,000 ARR = $30,000 lost.

👉 The Churn Impact Calculator shows how churn eats into your recurring revenue.

Why ARR Matters for Your Business

  • Investor Trust – ARR is a key SaaS valuation metric. Clear, consistent ARR builds credibility.
  • Forecasting Growth – ARR gives you a long-term view of revenue health.
  • Strategic Decisions – Use ARR to decide when to expand the team, raise capital, or adjust pricing.
  • Customer Insights – Fluctuations in ARR reveal retention challenges or upsell opportunities.

ARR vs. MRR: What’s the Difference?

  • MRR = short-term monthly recurring revenue.
  • ARR = long-term annualized recurring revenue.

Both are essential. MRR keeps you on top of day-to-day performance, while ARR shows long-term growth potential.

Common Mistakes in ARR Calculation

  • Counting one-time fees or setup charges as recurring.
  • Ignoring downgrades or churn when projecting.
  • Using inconsistent definitions across finance, sales, and board reports.
  • Forgetting to adjust ARR when expansion revenue changes the contract value.

FAQs About ARR

What’s considered a good ARR milestone for SaaS?
Hitting $1M ARR is a common benchmark for early-stage SaaS growth.

Does ARR include churn?
Yes. True ARR accounts for churn and downgrades, not just gross revenue.

Is ARR the same as bookings?
No. Bookings represent signed deals, while ARR reflects active, recurring revenue.

How often should ARR be updated?
Monthly or quarterly, depending on your reporting cycle.

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