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What Is Annual Recurring Revenue (ARR)? How to Calculate
Discover how recurring revenue, like subscriptions, can help grow your revenue year over year.
By Belal Batrawy Founder, learntosell.io
August 29, 2025
One thing that ensures stability in life — and in business — is a reliable income stream. The subscription model, whether monthly or annual, provides businesses with steady and predictable revenue.
But what is annual recurring revenue (ARR)? Read on to learn how annual recurring revenue works and how revenue management software can help improve your bottom line.
What is annual recurring revenue?
Annual recurring revenue is a key sales metric that measures the consistent, predictable revenue a company anticipates generating each year from subscriptions, renewals, and upgrades.
Annual recurring revenue is frequently used by companies that offer a software as a service (SaaS) model. It is also equally useful for streaming services, cell phone bills, and almost any product or service that has consistent, predictable charges.
Difference between annual recurring revenue (ARR) and total revenue
Annual recurring revenue tracks predictable, subscription-based income while total revenue includes all income generated by a business, both recurring and non-recurring. Total revenue captures one-time purchases, setup fees, professional services, and any other revenue outside of subscriptions. While annual recurring revenue helps track the stability of recurring income, total revenue provides a comprehensive view of your company's earnings from all sources over a specific period.
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Importance of annual recurring revenue for sales teams
Annual recurring revenue is a key metric for any business with a subscription model. It offers a clear snapshot of a company's financial health and future revenue potential, aiding businesses in accurately forecasting future income. It also helps track a company's growth over time by comparing annual recurring revenue year over year (YOY).
Investors often value companies with stable annual recurring revenue because of their predictable cash flow. They're more attractive because investors prefer stable revenue streams over fluctuating one-time sales.
Some other benefits of annual recurring revenue include:
- Customer retention: Annual recurring revenue emphasizes the importance of maintaining long-term customer relationships, leading to increased customer loyalty.
- Reduced sales pressure: There's less pressure on the sales team to constantly acquire new customers, so they can focus on upselling and cross-selling to existing customers.
- Sales targets: With a steady revenue stream, it's easier for sales and marketing leaders to set realistic goals for their reps.
- Scalability: It's easier to scale operations and growth strategies with a reliable revenue base.
- Performance metrics: Annual recurring revenue provides clear metrics on revenue growth and customer retention.
- Customer insights: Annual recurring revenue offers valuable insights into customer behavior and preferences through subscription and usage patterns.
How to calculate annual recurring revenue
To calculate annual recurring revenue, determine the total revenue from recurring subscriptions over a year, whether on a weekly, monthly, or annual basis. Be sure to include any additional revenue from upgrades and add-ons and subtract revenue lost due to cancellations and downgrades.
Follow these three steps to calculate annual recurring revenue:
- Add up the total revenue from annual subscriptions for your products and services.
- Add up the total amount of additional ongoing revenue (things like maintenance and support).
- Subtract the total amount lost through subscription cancellations (otherwise known as customer churn).
Annual recurring revenue formula
Here's the formula for calculating annual recurring revenue:
Subscription revenue + additional ongoing revenue – cancellations = annual recurring revenue (ARR)
For example, an SaaS company has annual subscriptions of $10 million. The company has additional revenue of $1 million for maintenance fees. It loses about 2% of its customers per year, or $200,000.
Here's how it looks as a formula:
$10,000,000 + $1,000,000 – $200,000 = $10,800,000
If your products or services are sold via a monthly subscription, you can use the same formula. However, first multiply the monthly recurring revenue by 12.
To drill down further and get a clearer picture of how your sales strategy works, break down the annual recurring revenue formula into these components:
- Revenue added from new customers
- Revenue added from renewals
- Revenue added from upgrades
- Revenue lost from downgrades
Let's say the same SaaS company had additional revenue of $500,000 annually from new customers.
Here's how it looks as a formula:
$10,800,000 + $500,000 = $11,300,000
Note that for an SaaS company, the annual recurring revenue should include the subscription fees for the service along with additional fees for things like ongoing maintenance and support. Annual recurring revenue refers to ongoing revenue. So, when calculating your annual recurring revenue, be sure to exclude any one-time charges or fees.
What's a good ARR growth rate?
A "good" annual recurring revenue growth rate largely depends on a company's size and stage. Startups often target rapid, aggressive growth while mature companies prioritize stability and efficiency. These are some of the most common growth benchmarks .
- Early-stage startups
For early-stage companies, a strong annual recurring revenue growth rate generally falls between 100% to 300% year-over-year. Ambitious startups often aim to follow the "triple, triple, double, double, double" model — also known as T2D3 — a SaaS growth mantra. The goal is to triple annual recurring revenue for two consecutive years, then double it for the next three, signaling aggressive yet scalable growth to potential investors. - Mid-stage companies
Mid-stage companies have progressed beyond survival and are now focused on sustainable scaling. At this stage, a healthy annual recurring revenue growth rate ranges between 40% to 100% year-over-year. This pace is fast enough to impress investors and continue scaling while also being manageable enough to maintain operational control and efficiency. - Mature businesses
Established companies typically see year-over-year ARR growth slow to less than 40%. Depending on your company, a sustainable revenue growth target may be 10%-30%. Rather than pursuing hypergrowth, they focus on minimizing churn, expanding existing customer relationships, and strategically entering new markets. At this stage, efficiency, profitability, and predictable growth are the primary goals.
How to improve your annual recurring revenue
Improving your annual recurring revenue requires four main steps:
- Reduce churn: With an annual subscription, customers are locked in for 12 months. To reduce churn, you need to find out why your customers didn't renew. If your product or service doesn't meet customer expectations — or worse, it just doesn't work — that's the first area for improvement. Personalizing the customer experience (CX) also reduces churn. More than half (56%) of consumers say they'll become repeat buyers after a tailored experience, according to the latest Salesforce State of Sales Report.
- Market to the right customers: Develop a robust customer profile to help your sales team better understand your target customers' wants, needs, and preferences. Get personal with data-driven marketing and deliver the right message to the right audience at the right time.
- Create multiple revenue streams: Offer different platforms, products, and upgrades to your customers. But make sure these add-ons are charged annually for them to factor into your annual recurring revenue.
- Rethink your pricing strategy: Take a look at what your competitors are charging for their products or services. Consider adjusting if you're priced too high in the marketplace — or too low.
What to look for in sales-tracking tools
Some variables can affect how your annual recurring revenue is calculated — and that's where customer relationship management (CRM) software comes into play. Your CRM is only as good as the data you and your team input.
And with sales tracking — the process of collecting, analyzing, and reporting on sales data — you'll have a clearer understanding of your company's performance.
When setting up a sales-tracking system, it's important to create a logical workflow — how you collect data, sift through it, and report on it. It's essential to make sure the reports generated are clear and highlight key metrics that provide actionable insights.
In addition to your CRM, here are three other sales-tracking tools that can turbocharge your sales tracking:
- Visualization and dashboard tools: Sales dashboards can help visualize sales data in real time, turning rows of data into clear, actionable insights. At a glance, you can see where you're hitting your targets — and where you need to switch gears.
- Real-time analytics tools: The best analytics tools dig deep into your sales data, uncovering trends and patterns that aren't immediately obvious. These tools track conversion rates and pinpoint your most lucrative sales channels.
- Automation tools: Sales reps spend just 28% of their time actually selling, according to Salesforce's State of Sales Report. Automated tools help to capture data such as emails, phone calls, and customer interactions — and then automatically log that information directly into your CRM.
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Keep track of your annual recurring revenue
Annual recurring revenue is an essential metric for any business with a subscription model. It represents the predictable revenue expected annually and is vital for assessing a company's financial health and potential for growth. To optimize annual recurring revenue, companies should focus on reducing churn, targeting the right customers, diversifying revenue streams, and refining pricing strategies. With annual recurring revenue, you have one more tool in your sales playbook.
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