ARR

Business
About 1 min read

Annual Recurring Revenue (ARR) is the sum of recurring revenues generated over a year in a subscription-based business. Calculated by converting pure subscription revenue (excluding one-time fees) into an annual figure, it is the most critical metric for measuring the growth potential and financial stability of SaaS and AI service companies.

Also known as
Annual Recurring RevenueAnnual Recurring Revenue

Detailed explanation

ARR is calculated by multiplying Monthly Recurring Revenue (MRR) by 12 or by subtracting one-time revenues, such as installation or training fees, from the Annual Contract Value (ACV). It demonstrates the predictability of a business and serves as a core metric for valuation. Since AI companies must handle high GPU infrastructure and API inference costs, securing a stable ARR is a measure of service sustainability. Particularly due to the nature of AI services, which often employ usage-based pricing, distinguishing 'variable ARR' reflecting actual usage or 'experimental revenue (ERR)' from fixed subscription fees has also become important.

Why It Matters in Tool Selection

The size of an AI tool provider's ARR is directly linked to the 'sustainability' of its service. Since operating AI models incurs massive computing costs, startups with low ARR carry high risks of sudden service interruptions or delayed updates. When adopting tools in an enterprise environment, the company's ARR growth trend serves as a reliability indicator to verify its capability to provide technical support and execute its roadmap.

What to Check

  • Is it inflated by including one-time setup fees in addition to pure subscription revenue?
  • In the case of usage-based pricing, is the figure calculated by converting the average usage of the past 3 to 6 months into an annual rate?
  • Is the Net Revenue Retention (NRR) disclosed alongside it to support the qualitative growth of ARR?

Examples

For an AI solution company with 50 enterprise customers paying a monthly subscription of 1 million KRW, the MRR is 50 million KRW and the ARR is 600 million KRW. If they secure a new annual contract of 200 million KRW and generate 50 million KRW in one-time consulting revenue, the new ARR is calculated as 800 million KRW, excluding the 50 million KRW consulting fee.

Confusing Terms

ARR vs. Revenue

Revenue represents historical performance and includes one-time income, whereas ARR is a forward-looking metric predicting the next 12 months based on current contracts.

ARR vs. ERR

ERR (Experimental Revenue) is temporary revenue paid by customers to test AI features, which is highly volatile compared to ARR.

Related terms

MRR