Annual Recurring Revenue

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ARR is the revenue of recurring items in the life of a 12-month subscription contract. SaaS companies would much prefer all their new customers to be on an annual plan (or longer) as they get paid upfront for 12 months of service. Yearly subscriptions not only provide companies with better cash flow but allow for more accurate predictions of growth trends due to the fact that recurring revenue totals are already in place when entering a new year. For example, if you had 10M in annual recurring revenue and wanted to grow your business by 15%, you can easily calculate that you would need to add 1.5M in new customer sales to meet this goal.

When calculating ARR you should exclude one-time costs, such as onboarding/setup fees due to the fact that typically they only occur once in a new customer contract.

In other words, your ARR calculation should only include customer contracts with a 12-month term or more. Customers who subscribe to a monthly service plan should not be included in your ARR calculation, as they may leave within the 12 month period.