ARR Calculator

Method 1: MRR-Based ARR Calculation

ARR = MRR x 12

Example:
Current MRR: $125,000
ARR = $125,000 x 12 = $1,500,000

Method 2: Contract-Based ARR Calculation

ARR = (Annual Contracts) + (Monthly Contracts x 12) + (Quarterly Contracts x 4) + (Multi-Year Contracts / Years)

Example:
Annual contracts: $800,000
Monthly contracts: $25,000/month x 12 = $300,000
Quarterly contracts: $50,000/quarter x 4 = $200,000
3-year contract: $600,000 / 3 = $200,000
Total ARR = $1,500,000

Normalizing Different Contract Types:

What to Include in ARR:

• Subscription fees (all billing frequencies)
• Committed annual minimum fees
• Recurring platform fees
• Annual maintenance contracts

What to Exclude from ARR:

• One-time implementation fees
• Professional services revenue
• Variable usage charges above committed minimums
• Hardware or physical product sales
• Free trial users not yet converted

Understanding when to use ARR versus MRR is crucial for effective SaaS management:

When to Use ARR:

When to Use MRR:

Conversion Between ARR and MRR:

ARR = MRR x 12
MRR = ARR / 12

Example:
$1.2M ARR = $100K MRR
$50K MRR = $600K ARR

Common Pitfalls When Converting:

1. Annual prepay timing: Customer pays $12K upfront but only $1K/month should be MRR
2. Multi-year deals: 3-year $300K deal = $100K ARR, not $300K
3. Quarterly contracts: $30K/quarter = $120K ARR, not $30K or $360K
4. Usage minimums: Only committed minimum counts, not estimated usage

The "ARR is MRR x 12" Simplification: This formula assumes stable, monthly-billed revenue. For enterprise-heavy businesses with annual contracts, calculate ARR directly from contract values rather than multiplying MRR. Discrepancies between the two methods often reveal calculation errors or timing issues.

Breaking down ARR changes reveals business health better than total ARR alone:

1. New ARR (New Business) Revenue from brand new customers in their first contract year.

New ARR = Sum of first-year contract values from new logos

Example: 20 new customers at $50K ACV average = $1M New ARR

Benchmark: Should be 60-80% of gross new ARR for growth-stage companies.

2. Expansion ARR (Upsell/Cross-sell) Additional revenue from existing customers through upgrades, add-ons, or seat increases.

Expansion ARR = (Customer's new annual value) - (Customer's previous annual value)

Example: Customer upgrades from $30K to $50K = $20K Expansion ARR

Benchmark: Best-in-class achieves Expansion ARR equal to 30-50% of Churned ARR.

3. Contraction ARR (Downgrades) Revenue lost when existing customers reduce their contracts but don't cancel entirely.

Contraction ARR = (Previous annual value) - (New annual value)

Example: Customer downgrades from $100K to $60K = $40K Contraction ARR

Benchmark: Should be less than 5% of starting ARR annually.

4. Churned ARR (Lost Customers) Revenue lost from customers who completely cancel.

Churned ARR = Sum of ARR from all cancelled customers

Example: 10 customers cancel, averaging $30K ARR = $300K Churned ARR

Benchmark: Target under 10% annually for SMB, under 5% for enterprise.

5. Reactivation ARR Revenue from previously churned customers who return.

Reactivation ARR = Sum of ARR from returning former customers

Benchmark: Typically 10-20% of churned ARR for mature companies.

The ARR Waterfall Formula:

Ending ARR = Starting ARR + New ARR + Expansion ARR + Reactivation ARR - Contraction ARR - Churned ARR

Net New ARR = New ARR + Expansion ARR + Reactivation ARR - Contraction ARR - Churned ARR

Example ARR Bridge (Annual):

Performance expectations vary significantly by ARR stage (sources: SaaS Capital, KeyBanc):

YoY ARR Growth Rate Benchmarks (2026):

ARR Churn Benchmarks (Annual):

Net Revenue Retention (NRR) Benchmarks:

Calculate your retention metrics with our Churn Rate Calculator.

2026 ARR Valuation Multiples:

Evaluate your company with our SaaS Rule of 40 Calculator.

Net New ARR reveals whether your business is actually growing after accounting for losses:

Net New ARR Formula:

Net New ARR = New ARR + Expansion ARR - Contraction ARR - Churned ARR

Or simplified:
Net New ARR = Gross New ARR - Gross Lost ARR

Why Net New ARR Matters:

• Positive Net New ARR: Business is growing organically
• Zero Net New ARR: Growth has stalled - you're replacing lost customers
• Negative Net New ARR: Death spiral - urgent intervention needed

Healthy Net New ARR Profile by Stage:

Net New ARR Quality Analysis:

Expansion Ratio = Expansion ARR / (Churned ARR + Contraction ARR)

> 1.0 = Net negative churn (growing without new sales)
0.5-1.0 = Healthy expansion
< 0.5 = Expansion needs work

Warning Signs in Net New ARR:

Net New ARR and Burn Rate:

Burn Multiple = Net Burn / Net New ARR

Track your runway with our Burn Rate Calculator.

• Excellent: <1x (Adding more ARR than burning)
• Good: 1-2x (Efficient growth)
• Concerning: 2-3x (Expensive growth)
• Critical: >3x (Unsustainable, runway at risk)

Year-over-Year (YoY) ARR Growth Rate:

YoY Growth = ((Current ARR - Previous Year ARR) / Previous Year ARR) x 100

Example:
Previous Year ARR: $3,000,000
Current ARR: $4,500,000
YoY Growth: (($4,500,000 - $3,000,000) / $3,000,000) x 100 = 50%

Quarter-over-Quarter (QoQ) Growth:

QoQ Growth = ((Current Quarter ARR - Previous Quarter ARR) / Previous Quarter ARR) x 100

Example:
Q4 ARR: $4,500,000
Q3 ARR: $4,100,000
QoQ Growth: (($4,500,000 - $4,100,000) / $4,100,000) x 100 = 9.8%

Annualized Growth from Monthly:

Annualized Growth = ((1 + Monthly Growth Rate)^12 - 1) x 100

Example:
3% monthly growth -> ((1.03)^12 - 1) x 100 = 43% annualized

Monthly Growth to Annual Conversion Table:

CAGR (Compound Annual Growth Rate):

CAGR = ((Ending ARR / Beginning ARR)^(1/Years) - 1) x 100

Example (3-year):
Year 1 ARR: $1,000,000
Year 4 ARR: $5,000,000
CAGR: (($5,000,000 / $1,000,000)^(1/3) - 1) x 100 = 71%

The T2D3 Growth Benchmark: For venture-scale SaaS aiming for $100M+ ARR:

This requires ~10-15% monthly growth early, moderating to ~6% by year 5.

ARR is the primary input for SaaS company valuations:

Basic Valuation Formula:

Enterprise Value = ARR x Revenue Multiple

Example:
$10M ARR x 8x multiple = $80M valuation

What Determines Your ARR Multiple (2026):

Measure these with our LTV Calculator and SaaS Rule of 40 Calculator.

2026 Public SaaS Multiples by Profile:

Private Company Discount: Private SaaS companies typically trade at 20-40% discount to public comparables:

Private Valuation = (Public Multiple x 0.6-0.8) x ARR

Example:
Public comps at 10x ARR
Private discount: 30%
Private valuation: 7x ARR

ARR Quality Adjustments: Investors adjust valuations based on ARR quality:

ARR for Acquisition Multiples: M&A valuations often use different frameworks:

• Strategic acquisitions: 3-10x ARR (synergy value)
• PE acquisitions: 2-5x ARR (cash flow focus)
• Acqui-hires: 0.5-2x ARR (team value)

Calculate your company's potential value with our SaaS Valuation Calculator.

Understanding ARR distribution across customer segments reveals strategic insights:

ARR Concentration Analysis:

Top 10 Customer ARR % = (ARR from Top 10 Customers / Total ARR) x 100

Healthy: <30%
Acceptable: 30-50%
Risky: >50%

ARR by Customer Size:

Average Contract Value (ACV) Analysis:

ACV = Total New ARR / Number of New Customers

Example:
$2,000,000 New ARR / 40 new customers = $50,000 ACV

ACV Benchmarks by Segment:

ARR Cohort Analysis: Track ARR by customer acquisition year:

Declining cohort retention signals product or market issues.

Logo vs Dollar Retention:

Logo Retention = (Retained Customers / Starting Customers) x 100
Dollar Retention = (Retained ARR + Expansion) / Starting ARR x 100

Example:
Started with 100 customers, $5M ARR
Lost 10 customers ($300K ARR)
Expansion from retained: $400K
Logo Retention: 90%
Dollar Retention: ($4.7M + $0.4M) / $5M = 102%

Track these metrics with our Churn Rate Calculator.

Simple ARR Forecast Model:

Next Year ARR = Current ARR x (1 - Annual Churn) + Expected New ARR + Expected Expansion

Example:
Current ARR: $5,000,000
Annual Churn: 10%
Retained: $5,000,000 x 0.90 = $4,500,000
New ARR Target: $2,500,000
Expansion Target: $500,000
Next Year ARR: $7,500,000 (50% growth)

Bottoms-Up ARR Forecast:

New ARR = (Sales Reps x Quota x Attainment Rate)
Expansion ARR = (Expansion-Eligible ARR x Expansion Rate)
Churned ARR = (Starting ARR x Historical Churn Rate)

ARR Scenario Planning:

Quarterly ARR Targets:

Q1-Q4 ARR Build:
Q1: +20% of annual target (ramp from holidays)
Q2: +25% of annual target
Q3: +20% of annual target (summer slowdown)
Q4: +35% of annual target (budget flush)

Leading Indicators for ARR:

ARR to Cash Flow Timing:

Note: ARR is not cash. A company with $10M ARR might only collect $8M cash in year one due to timing, failed payments, and terms.

Avoid these errors that can misrepresent your ARR:

Mistake 1: Including One-Time Revenue

Mistake 2: Multi-Year Contract Errors

Mistake 3: Monthly Subscription Errors

Mistake 4: Counting Non-Committed Revenue

Mistake 5: Currency Inconsistency

• Use one currency (typically USD) for all ARR
• Apply exchange rate consistently (monthly average or spot)
• Document the approach for auditors

Mistake 6: Timing Recognition

ARR Audit Checklist:

1. Is all revenue truly recurring and contractual?
2. Are multi-year deals annualized correctly?
3. Is one-time revenue excluded?
4. Are monthly/quarterly contracts annualized?
5. Is the currency and timing consistent?
6. Is Contracted vs Live ARR distinguished?
7. Is the methodology documented for investors?

Standard ARR Reporting Package: Every board meeting and investor update should include:

1. ARR Summary Table:

2. ARR Bridge Visualization: Waterfall chart showing: Starting ARR -> +New -> +Expansion -> -Churn -> -Contraction -> Ending ARR

3. Growth Metrics:

4. Segmentation:

• ARR by customer size
• ARR by geography
• ARR by product line
• Top 10 customer concentration

5. Quality Metrics:

• Contracted vs Live ARR
• Logo count and ACV
• Cohort retention curves
• Expansion rate by segment

Monthly Operating Review Additions:

• Pipeline coverage for quarter
• Sales efficiency (CAC payback)
• ARR per employee
• Magic number (Net New ARR / S&M spend)

Annual Strategic Additions:

• Multi-year ARR forecast
• Scenario analysis
• Competitive ARR benchmarking
• Rule of 40 trajectory

What Investors Ask About ARR:

1. What's your ARR and growth rate?
2. What's your NRR/GRR?
3. What's your customer concentration?
4. What's the ARR by contract term?
5. How does ARR translate to cash?
6. What's your path to profitability at current ARR?