7 Ways to Measure Annual Recurring Revenue (ARR)

ARR, or Annual Recurring Revenue, is a key metric for SaaS businesses, as it represents predictable, annualised revenue from subscription services. Investors and stakeholders rely on ARR to understand growth and assess the long-term financial health of a company.

For SaaS businesses at each stage of funding—from early-stage to maturity—benchmark ARR levels and growth rates are crucial for evaluating progress and gauging investment readiness. Here’s a breakdown of the most common ways to measure ARR, each offering unique insights into growth and financial performance.

Many Founders wonder what ARR they are expected to achieve before approaching each funding round. Benchmarks obviously vary based on stage, sector, growth trajectory and macroeconomic outlook. Historically, the consensus has been that while Seed funding can often be raised at pre-revenue stages, Series A investors tend to require $1m ARR, while for Series B a healthy metric should increase to $5m and then $10m for Series C.

Standard ARR, however, is only one of many ways to measure the recurring yearly value of a SaaS company’s active subscriptions. There are many variants of this metric that are helpful to track different insights.

Standard ARR Calculation

The basic ARR calculation is straightforward: if your contracts are yearly, take the sum of all active subscriptions at any given time; if your contracts are monthly, simply multiply Monthly Recurring Revenue (MRR) by 12 to get the annualised revenue from subscriptions.

For example, if MRR is £5,000, the standard ARR would be £60,000. This measure provides a clear baseline of the company’s recurring revenue.

New ARR

New ARR calculates revenue generated from new customer acquisitions within a specific period. It’s calculated by summing the annualised revenue from all new customers acquired in the given time period.

This metric is vital for evaluating growth through customer acquisition. Companies should aim for rapid New ARR growth to demonstrate market traction, especially in the seed and Series A stages where high growth rates (at least 100%, or even 200% year-over-year) are key for attracting investors.

By stacking this metric against churn and Standard ARR, it’s possible to identify some pain points in customer retention, where a SaaS company might be great at attracting new customers, proving market opportunity and positioning, but not so good at keeping them.

Expansion ARR

Expansion ARR measures additional revenue from existing customers through upsells, cross-sells, or additional services. This is calculated by annualising the revenue increase from these expansions within a given period. Expansion ARR is crucial for understanding how effectively a company can grow its revenue without relying solely on new customer acquisition.

For later-stage companies, high expansion ARR is desirable as it shows strong product-market fit and customer loyalty, as well as reassuring investors that profit margins can be widened while keeping costs contained.

Contraction ARR

Contraction ARR calculates the revenue lost due to customers downgrading to lower-priced plans. It’s determined by annualising the revenue lost from downgrades over a set period. This metric provides insight into areas where service value or customer satisfaction may need improvement.

Keeping contraction low is essential at all stages, as it reflects customer satisfaction and product fit, with top SaaS companies maintaining contraction rates as low as 5% of ARR.

Churned ARR

Similar to Contraction, Churned ARR reflects the total revenue lost due to cancelled subscriptions. It’s calculated by summing the AAR (or annualising the MRR) lost from cancellations within a period.

A low churn rate is critical, as high churn can undermine ARR growth and signal customer dissatisfaction. SaaS companies that can maintain churn rates below 10% are generally viewed more favourably by investors, particularly in the growth stage where customer retention becomes increasingly important.

Net New ARR

Net New ARR combines New ARR and Expansion ARR, subtracting both Contraction ARR and Churned ARR, gives a holistic view of revenue changes, showing the net effect of all ARR components. It is calculated as:

New ARR + Expansion ARR – Contraction ARR – Churned ARR

Series B and later-stage investors look for strong Net New ARR growth, as it signals that a company is still effectively scaling while entering the more mature stage of its business model.

ARR Growth Rate

ARR Growth Rate measures the percentage increase in ARR over a specified period, often year-over-year, calculated as:

Current ARR – Previous ARR
__________________________ ×100
Previous ARR

ARR Growth rates between 100% and 200% or more are common for early-stage companies with lower ARR, while later-stage companies with high ARR often aim for stable growth in the range of 30-50% per year. ARR Growth Rate is a vital metric for mature SaaS companies, helping investors understand the business’s growth momentum and scalability.