What is Annual Recurring Revenue (ARR)?
Annual Recurring Revenue (ARR) is the annualized value of subscription contracts active at a point in time. It’s the single most-watched metric in SaaS — investors, boards, and analysts use it as the north star. Unlike GAAP revenue (which recognizes income over the service period), ARR captures the forward-looking commercial commitment.
Formula
ARR = Σ (Subscription contract value, annualized)
Multi-year contracts: divide total value by years. Monthly subscriptions: multiply MRR by 12.
ARR vs related metrics
- ARR vs MRR: Same concept; ARR is annual ($1M ARR = $83.3k MRR)
- ARR vs Bookings: Bookings = total contract value signed in period (including one-time, services). ARR = recurring portion only
- ARR vs Revenue (GAAP): GAAP rev recognizes ratably over service period. ARR is a point-in-time snapshot
Net new ARR breakdown
- New ARR: From brand-new customers
- Expansion ARR: From upgrades, seat adds, cross-sell within existing accounts
- Contraction ARR: Downgrades, seat reductions
- Churned ARR: Customers who fully cancelled
- Net New ARR = New + Expansion − Contraction − Churn
Healthy SaaS benchmarks (2025)
- Top quartile: Net Dollar Retention (NDR) > 120% (expansion > churn)
- Median: NDR 105-115%
- Below 100%: leaky bucket — fix retention before scaling acquisition
Practical implications for founders
Track ARR monthly with full breakdown (new vs expansion vs churn). In Series A+ DD, expect 24-month ARR waterfall. Don’t conflate ARR with revenue in your pitch deck — investors will catch it and trust drops. See CAC and LTV for related unit economics.