What is ARR (Annual Recurring Revenue)?
Annual Recurring Revenue (ARR) is the annualized value of all recurring subscription contracts in a SaaS business at a specific point in time, normalized to a 12-month period. ARR excludes one-time setup fees, professional services revenue, and hardware sales. If a customer pays $1,000 per month on a monthly subscription, their ARR contribution is $12,000. If they pay $10,000 for a 2-year contract, their ARR contribution is $5,000 per year.
ARR Components and Waterfall
ARR is typically tracked as a waterfall of five components: New ARR (revenue from new customers signed in the period), Expansion ARR (additional revenue from existing customers through upsells and seat additions), Contraction ARR (revenue lost from existing customers due to downgrades, negative value), Churned ARR (revenue lost from customers who canceled entirely, negative value), and Net New ARR (the sum of all four: New + Expansion – Contraction – Churned). Net New ARR is the single most important SaaS growth metric, measuring whether the business is growing its recurring revenue base each period.
Frequently Asked Questions
What is the difference between ARR and MRR?
MRR (Monthly Recurring Revenue) is ARR / 12. For monthly subscription businesses, MRR is typically the operational metric (reported monthly), while ARR is the annualized view used for investor reporting and valuation discussions. Annual contract businesses (where customers pay annually upfront) are better represented by ARR directly. For businesses with a mix of monthly and annual contracts, ARR provides a normalized comparison metric. Most SaaS benchmarks and investor conversations use ARR as the standard growth metric regardless of billing frequency.
What ARR growth rates are considered strong for SaaS?
ARR growth benchmarks by stage: seed/pre-product-market-fit: 50-200% annual growth. Series A (around $1-5M ARR): 100-200% annual growth. Series B ($5-20M ARR): 80-150% annual growth. Series C+ ($20M+ ARR): 40-80% annual growth. Public SaaS companies: typically 20-50% growth. The T2D3 benchmark (triple, triple, double, double, double) describes strong growth trajectory for companies scaling from $2M to $100M ARR: 3x at $2M, 3x to $6M, 2x to $12M, 2x to $24M, 2x to $48M. Actual growth expectations vary significantly by category, competitive dynamics, and economic environment.