ARR (Annual Recurring Revenue) represents the yearly value of recurring revenue from subscriptions, memberships, or contracts. For subscription-based e-commerce businesses, ARR provides a clear view of predictable revenue and growth trajectory.
What is ARR?
ARR measures the annualized value of active subscriptions. Unlike one-time sales, recurring revenue creates predictable cash flow that investors and operators use to evaluate business health.
ARR includes:
- Monthly subscription fees (annualized)
- Annual subscription payments
- Recurring service contracts
- Membership fees
ARR excludes:
- One-time purchases
- Setup fees
- Variable usage charges
- Non-recurring add-ons
How to Calculate ARR
For monthly subscriptions:
ARR = MRR × 12
For mixed subscription periods:
ARR = Sum of all active annual contract values
Example: A store has 500 monthly subscribers at $20/month and 100 annual subscribers at $200/year.
ARR = (500 × $20 × 12) + (100 × $200) = $120,000 + $20,000 = $140,000
ARR Components
Tracking ARR changes helps identify growth drivers:
New ARR: Revenue from new customers Expansion ARR: Revenue from upgrades and add-ons Churned ARR: Lost revenue from cancellations Contraction ARR: Revenue lost from downgrades
Net New ARR = New ARR + Expansion ARR - Churned ARR - Contraction ARR
How to Interpret ARR
ARR growth rate indicates business trajectory. SaaS and subscription businesses typically target 20-50% year-over-year ARR growth in early stages.
Compare ARR to:
- Previous periods (growth rate)
- Customer (payback period)
- Operating expenses (runway and profitability)
ARR alone does not show profitability. A business can grow ARR while losing money on each customer.
