Unlock long-term revenue visibility for your SaaS business! Discover what ARR is, how to calculate it, and why it’s a must-know metric for scaling any SaaS business.
💡 What is ARR?
Annual Recurring Revenue (ARR) is the predictable income a SaaS or subscription business generates over a year from active, recurring subscriptions.
It doesn’t include one-time charges like setup fees, hardware cost or consulting, and zooms in on repeatable, contract-based revenue you can count on annually.
🚀 Why ARR Matters
Here’s why founders, CFOs, and VCs love ARR:
- Long-Term Visibility – It helps you plan hiring, investments, and strategy with clarity.
- Performance Benchmark – Your ARR trend-line is a direct signal of how well your business is scaling.
- Investor Confidence – ARR shows “locked-in” revenue and is a go-to KPI in late-stage fundraising.
- Product-Market Fit Indicator – A growing ARR (with low churn) typically means customers are sticking around.
🧮 How to Calculate ARR
✅ Basic Formula
If you charge monthly:
ARR = MRR × 12
If you charge annually:
ARR = Sum of all active annual subscription contracts
And if your business has upsells, downgrades, or churn — break it down to calculate Net ARR:
| ARR Component | Definition | Example |
|---|---|---|
| New ARR | Revenue from brand-new customers this year | 50 new annual customers @ ₹20,000 → ₹10,00,000 |
| Expansion ARR | Upgrades, add-ons from existing customers | 20 customers upgraded ₹5,000 each → ₹1,00,000 |
| Churned ARR | Lost revenue from cancellations | 10 customers churned from ₹15,000 plans → ₹1,50,000 loss |
| Contraction ARR | Downgrades to lower plans | 5 customers downgraded by ₹3,000 → ₹15,000 loss |
➕ Net New ARR Formula
Net New ARR = New ARR + Expansion ARR – Churned ARR – Contraction ARR
Using the above examples:
Net ARR = ₹10,00,000 + ₹1,00,000 – ₹1,50,000 – ₹15,000 = ₹9,35,000
⚠️ Common Mistakes to Avoid
❌ Including non-recurring revenue – Setup fees, hardware, or consulting don’t count.
❌ Using invoice dates – ARR should reflect active subscriptions, not when you billed.
❌ Mixing contract lengths – Normalise monthly and annual plans to a yearly value as different plans could have different value.
❌ Not updating ARR for churn – ARR must drop the moment a customer cancels.
❌ Forgetting discounts – Always use the actual billed amount post-discount.
🧠 Pro Tips
- Segment ARR by plan type or geography – Helps spot which products or regions are scaling best.
- Track ARR momentum MoM & YoY – Big changes = time to double-click.
- Boost Expansion ARR – It’s more efficient than acquiring new customers.
- Watch Gross vs Net ARR – Net ARR gives a truer picture of growth after churn.
- Use ARR for valuation – It’s often used in revenue multiples during acquisitions or fundraising.
📌 Bottom Line
ARR is your business’s heartbeat over the long term. How reliably you’re making it is as important as how much you are making.
Whether you’re optimizing pricing, chasing growth, or preparing for Series A/B/C — knowing your ARR (and what’s driving it) puts you in control of your SaaS growth story.