Annual Recurring Revenue (ARR)

How ARR is calculated

ARR is the normalised annual value of all recurring subscription revenue. For monthly contracts, ARR = MRR × 12. For multi-year contracts, only the annual component counts — the full contract value is not recognised at once. ARR excludes one-time fees, professional services, and variable usage revenue unless those components recur predictably. New ARR, churned ARR, and expanded ARR are tracked separately to understand what is driving the overall number.

Why ARR is the primary SaaS revenue metric

ARR captures the predictable, recurring component of revenue — the part the business can plan against. Unlike total revenue, which includes one-time items, ARR reflects the underlying health of the subscription base. Investors, boards, and revenue leaders use ARR as the anchor for growth rate calculations, retention analysis, and valuation. A business growing ARR at 80% year-on-year with strong retention looks fundamentally different from one at the same ARR figure with flat growth and declining NRR.

ARR movements to track

ARR is not a single number — it is a net figure made up of four movements: New ARR (from new customer acquisition), Expansion ARR (upsell and cross-sell from existing customers), Contraction ARR (downgrades), and Churned ARR (cancellations). Tracking each movement separately reveals which part of the commercial model is performing and which is not. A business with strong new ARR but high churn is running a leaky bucket. A business with modest new ARR but high expansion is building a durable compounding base.

How Closing Foundry uses it

ARR is the revenue anchor in every Revenue Planning engagement. Before building a capacity model or a hiring plan, we establish the current ARR base, the ARR movements of the last 12 months, and the implied growth rate required to hit the next milestone. In most cases, the gap between current ARR trajectory and plan target is larger than the team realises — because expansion ARR has been assumed rather than modelled, and churn has been underestimated. The ARR waterfall (new + expansion − contraction − churn) is the first thing we build to make the revenue reality visible.