#2 ARR ≠ Annual Run Rate

While we’ve already made this point in part one of this post, we want to emphasize again that when software businesses use ARR, they mean annual recurring revenue,NOT annual run rate. It’s a mistake to multiply the recognized bookings — and in some cases revenue — in a given month by 12 (thus “annualizing it”) and call that number ARR.

In a SaaS business, ARR is the measure of recurring revenue on an annual basis. It should exclude one-time fees, professional service fees, and any variable usage fees. This is important because in a given month you may recognize more revenue as a result of invoicing one-time services or support, and multiplying that number by 12 could significantly overstate your true ARR potential.

In marketplace businesses — which are more transaction-based and typically do not have contracts — we look at current revenue run rates, by annualizing the GMV or revenue metric for the most recent month or quarter.

One mistake we frequently see is marketplace GMV being referred to as “revenue”, which can overstate the size of the business meaningfully. GMV typically reflects what consumers are spending on the site, whereas revenue is the portion of GMV that the marketplace takes (“the take”) for providing their service.recurring

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