Annual recurring revenue

What is annual recurring revenue?

Annual Recurring Revenue (ARR) is the projected recurring income a company anticipates from ongoing subscriptions within a year. It’s an important metric for SaaS and subscription-based businesses, offering insight into the consistency and reliability of their revenue streams.

Non-recurring revenue, setup costs, and one-time payments are not included in ARR. If there is no churn or upgrades, ARR lets you figure out how much money your company will make each year.

How is annual recurring revenue calculated?

Here’s a simple formula to calculate ARR:

ARR = Total Monthly Recurring Revenue (MRR) × 12

And for subscription businesses with annual plans:

ARR = Number of active customers × Average annual subscription price

So, if you have 300 customers each paying $450 per year, your ARR is $135,000.

Why is ARR important for ecommerce subscriptions?

ARR provides valuable insight into your company’s performance, growth trajectory, and appeal to potential investors. It helps in planning, predicting, and measuring long-term progress. For Shopify merchants running subscription models, ARR reflects the stability and reliability of ongoing revenue, going beyond just one-time purchases.

Example of ARR

Suppose you run a coffee subscription store.

• You have 500 active subscribers.
• Each subscriber pays $20 per month for their subscription.

Now, here’s how you can calculate ARR:

500 subscribers × $20/month × 12 months = $120,000 ARR

So, your Annual Recurring Revenue is $120,000. This tells you an approximate revenue you will be generating in a year, assuming no churn or growth.

Driftcharge Tip

Use ARR to track your subscription growth, but don’t forget to pair it with metrics like churn rate and LTV.

Ganesh Pawar

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Ganesh Pawar is the founder of Driftcharge, a subscription management app designed to help Shopify merchants streamline and scale their subscription businesses. With a deep focus on solving real-world pain points—like legacy account page support, flexible subscription options, and advanced analytics—Ganesh is passionate about building tools that drive growth and retention.