Annual Revenue Retention (ARR) Calculator
Calculate your Annual Revenue Retention to understand how well you are retaining your existing customer revenue year-over-year.
Your Annual Revenue Retention (ARR)
Understanding Annual Revenue Retention (ARR)
Annual Revenue Retention (ARR) is a crucial metric for subscription-based businesses, particularly Software as a Service (SaaS) companies. It measures the percentage of recurring revenue retained from existing customers over a specific period, usually one year. A high ARR indicates that a company is successful in keeping its customers and their associated revenue, which is vital for sustainable growth and profitability.
The formula for ARR focuses on how much revenue from your existing customer base at the beginning of a period is still present at the end of that period. It accounts for upsells (expansion revenue) and downgrades/churn (contraction and churn revenue).
How to Calculate ARR
The standard formula for ARR is as follows:
ARR = (Revenue at Start of Year + New Revenue Added – Revenue Lost During Year) / Revenue at Start of Year
Let's break down the components:
- Revenue at Start of Year: This is the total Annual Recurring Revenue (ARR) your company had from all active customers at the beginning of the fiscal year (or the 12-month period you are analyzing).
- New Revenue Added During Year: This includes revenue from new customers acquired during the year plus any expansion revenue from existing customers (e.g., upgrades, add-ons).
- Revenue Lost During Year: This encompasses revenue lost from churned customers (those who canceled) and contraction revenue from existing customers (e.g., downgrades).
The result of this calculation is typically expressed as a percentage.
Example Calculation
Let's consider a SaaS company with the following figures for a given year:
- Revenue at the Start of the Year: $1,000,000
- New Revenue Added (New Customers + Upsells): $250,000
- Revenue Lost (Churned Customers + Downgrades): $100,000
Using the formula:
ARR = ($1,000,000 + $250,000 – $100,000) / $1,000,000
ARR = ($1,150,000) / $1,000,000
ARR = 1.15
To express this as a percentage: 1.15 * 100 = 115%.
In this example, the company has an ARR of 115%. This indicates strong performance, as the revenue added and retained from existing customers (including upsells) more than compensated for any revenue lost.
Why ARR Matters
A high ARR is a strong indicator of:
- Customer Satisfaction & Loyalty: Customers are finding value in your product/service and are choosing to stay.
- Healthy Business Model: It suggests predictable revenue streams and reduced reliance on constant new customer acquisition.
- Growth Potential: Retained customers are often easier to upsell to, driving expansion revenue.
Conversely, a low ARR (especially below 100%) signals potential issues with customer churn, product-market fit, or customer success efforts that need immediate attention. Monitoring ARR allows businesses to proactively address problems and build a more stable and scalable revenue base.