Practical Ways to Increase arr in SaaS
Introduction
Arr is a foundational metric for subscription businesses because it converts recurring revenue into an annualized figure that’s easy to track and compare. Used correctly, arr helps founders, product leaders, and investors judge growth quality, forecast cash flow, and prioritize initiatives. This article explains what arr is, how to calculate it, practical ways to grow it, and common pitfalls to avoid.
What is arr?
arr (Annual Recurring Revenue) is the total value of recurring subscription income a company expects to receive over the next 12 months from active contracts. It excludes one-time fees, professional services, and any non-recurring payments. By standardizing recurring revenue on an annual basis, arr makes it easier to compare businesses with different billing cycles or contract terms.
ARR versus MRR
Monthly Recurring Revenue (MRR) measures the same recurring revenue on a monthly basis. The relationship is simple: ARR = MRR × 12, and MRR = ARR ÷ 12. MRR helps with short-term trend analysis while arr is preferred for strategic discussions and valuation conversations.
Why arr matters
arr matters because it:
- Feeds valuation models used by investors and acquirers.
- Simplifies comparisons across companies or product lines.
- Provides context for other metrics like churn, customer lifetime value (LTV), and payback period.
A stable or growing arr with low churn signals a healthy subscription business, while volatile arr often points to retention or product-market fit issues.
How to calculate arr
Calculate arr by summing the annualized value of all active, recurring subscriptions:
- Convert each recurring contract to an annual amount. For annual contracts, use the contract value for the year.
- Exclude one-time charges such as setup fees.
- Subtract recurring discounts or credits that apply to those subscriptions.
Nuances to consider
- If a customer upgrades mid-term, update the annualized amount to reflect the current recurring commitment.
- Remove canceled subscriptions immediately; if a customer cancels mid-term, prorate where appropriate.
- Include recurring add-ons and renewal fees only if they are contractually recurring.
Practical strategies to grow arr
Growing arr requires a mix of acquiring new customers and extracting more recurring value from existing ones. The following strategies are effective and repeatable.
Increase average revenue per account (ARPA)
Introduce tiered pricing and clearly defined value for higher tiers. Bundle complementary features or create usage-based add-ons that encourage customers to move up. Small increases in price or feature packaging can compound significantly across a customer base.
Prioritize retention and reduce churn
Improved onboarding, proactive customer success, and targeted product improvements reduce churn. Since acquiring new customers is more expensive than retaining existing ones, even small retention gains often yield large arr improvements over time.
Promote annual contracts and prepayment
Offering a discount for annual billing encourages longer commitments, improving cash flow and stabilizing arr. Annual contracts tend to reduce churn risk and increase lifetime value.
Drive expansion revenue
Implement formal upsell and cross-sell motions. Use account reviews and usage analytics to identify high-potential customers and present tailored upgrade paths.
Optimize sales motions for recurring revenue
Structure sales incentives and commissions toward ARR-friendly deals (multi-year, recurring add-ons) rather than one-time services. This shifts focus to sustainable revenue growth.
Improve product-led growth channels
Make it easy for users to find and adopt paid features through in-product prompts, self-serve upgrades, and frictionless billing. Product-led conversions can scale ARR with lower acquisition cost.
Monitoring arr responsibly
Track arr alongside complementary metrics: gross and net churn, expansion ARR, new ARR, and average contract value. Establish clear rules for what counts as recurring revenue so that teams report consistently.
Common mistakes to avoid
- Forgetting to account for discounts and refunds that reduce recurring amounts.
- Not updating arr after mid-term upgrades, downgrades, or cancellations.
- Relying on arr alone without monitoring churn or customer economics.
Frequently Asked Questions
How often should arr be reported?
Most companies update arr monthly and review trends quarterly. Monthly tracking captures short-term changes; quarterly reviews allow teams to align on strategy.
Can freemium or trial users be part of arr?
No. Only paying customers on recurring plans should be included. Free or trial users are potential future ARR but do not count until they convert to a paid recurring plan.
Does expansion revenue count toward arr?
Yes. Recurring revenue from upsells or cross-sells should be included once the new recurring amount is contractually active.
Should we include annual prepayments in arr immediately?
Yes. When a customer prepays an annual recurring subscription, include the full annual value in arr for the period the contract covers, provided it is a recurring subscription rather than a one-off purchase.
How does arr influence company valuation?
Investors often use ARR as a baseline for multiples when valuing subscription businesses. Predictable, growing ARR with low churn generally supports higher valuation multiples.
Conclusion
arr is a concise, powerful indicator of a subscription business’s scale and predictability. By measuring arr accurately, monitoring related metrics, and applying targeted growth strategies—retention, expansion, pricing, and annual contracts—companies can grow sustainable, predictable revenue. Use arr as one of several complementary KPIs to guide product, sales, and finance decisions and to demonstrate healthy recurring revenue growth over time.