ARR

ARR (Annual Recurring Revenue) is the total annualized value of all active recurring subscriptions. If you have 100 customers each paying $100/month, your ARR is $120,000 (100 x $100 x 12). ARR is the standard top-line metric for subscription businesses and is the number investors, boards, and leadership teams use to evaluate company size and growth trajectory.

Why it matters: ARR provides a normalized view of your recurring revenue that smooths out monthly fluctuations. While MRR (Monthly Recurring Revenue) is useful for operational management, ARR is the strategic metric. It is how SaaS companies are valued (often at a multiple of ARR), how growth rates are benchmarked, and how fundraising narratives are built. "We grew from $2M to $5M ARR in 18 months" is the language of SaaS.

Components of ARR: new ARR comes from new customer acquisitions. Expansion ARR comes from existing customers upgrading or increasing usage. Contraction ARR is lost from existing customers downgrading. Churned ARR is lost from customer cancellations. Net new ARR = new ARR + expansion ARR - contraction ARR - churned ARR. A healthy SaaS business has net new ARR that is positive and growing each quarter.

How to calculate: sum the annualized value of all active subscriptions. For monthly plans, multiply by 12. For annual plans, use the contract value. For usage-based pricing, annualize the trailing 12-month revenue or use the current run rate. Be careful about one-time fees (setup fees, professional services), which should not be included in ARR because they are not recurring.

ARR milestones: the SaaS world tracks growth against standard milestones. $1M ARR is the first major proof point. $5M ARR suggests product-market fit. $10M ARR is where scaling challenges begin. $100M ARR puts you in the "centaur" category. Growth rate expectations decrease as ARR increases: >200% growth is expected under $1M; >100% growth at $1-5M; >50% growth at $5-20M; >30% growth above $20M.

Common mistakes: including non-recurring revenue in ARR (one-time setup fees, consulting revenue). Counting contracted but not yet active subscriptions. Not segmenting ARR by source (new vs. expansion vs. existing) to understand growth drivers. Using different ARR definitions at different times, making trend analysis unreliable.

Practical example: a SaaS company reports $3.2M ARR at the start of Q1. During the quarter, they add $400K in new ARR, $120K in expansion ARR, lose $60K to contraction, and $180K to churn. Their end-of-Q1 ARR is $3.48M ($3.2M + $400K + $120K - $60K - $180K). Net new ARR of $280K. They note that expansion ARR is only 30% of new ARR and prioritize building upsell motions to improve this ratio, since expansion is significantly cheaper than new customer acquisition.