ARR Annual Recurring Revenue
The definitive glossary entry on ARR — the ARR formula, net new ARR, the MRR-to-ARR relationship, and 2026 ARR growth benchmarks by company stage.
What Is ARR?
Annual Recurring Revenue (ARR) is the annualized value of all active recurring subscription contracts — the run-rate revenue your customer base would generate over the next twelve months if nothing changed. It is the headline number SaaS companies are valued on, because it converts a portfolio of subscriptions into a single, forecastable asset.
ARR counts only recurring contract value. One-time setup fees, professional services, implementation, hardware, and non-committed usage overages are excluded. A disciplined ARR definition is what makes your growth rate, net revenue retention, and CAC payback comparable across the industry — and comparable is what investors pay a premium for.
The ARR Formula
Calculate ARR bottom-up from contracts, never top-down from bookings. Monthly-billed customers annualize by ×12; annual contracts count at full value.
Formula 1
ARR (from MRR)
ARR = MRR × 12
Example: $250k MRR → $3.0M ARR.
Formula 2
Net New ARR
New ARR + Expansion ARR − Churned ARR − Downgrade ARR
The yearly growth engine in one number. Negative net new ARR means the base is shrinking.
Key insight: Net New ARR is ARR's answer to net revenue churn. When expansion ARR outweighs churned + downgraded ARR, growth compounds even with zero new sales — the annualized face of net negative churn.
ARR Growth Benchmarks 2026
Investors price growth relative to scale. A 40% growth rate is mediocre at $2M ARR and top-decile at $100M. The 2026 bands below pair ARR stage with year-over-year growth expectations.
| ARR Stage | YoY Growth (Top Quartile) | Median Growth | Rule of 40 Check |
|---|---|---|---|
| < $1M | 150%+ | ~100% | N/A — growth stage |
| $1M – $10M | 80–150% | ~60% | Growth > 40 alone passes |
| $10M – $50M | 60–80% | ~40% | Strong |
| $50M – $100M | 40–60% | ~30% | Watch |
| $100M+ | 30–40% | ~20% | Needs profit |
Compiled from SaaS Capital's 2026 benchmark study, KeyBanc SaaS survey, and public S-1 cohort data.
ARR vs. MRR — When to Use Which
ARR and MRR describe the same base at different time scales, but they are not interchangeable in practice. Monthly granularity (MRR) is the operating cadence: it catches churn, downgrades, and expansion within weeks. Annual granularity (ARR) is the financing cadence: it is what board decks, valuation multiples, and Rule-of-40 math use.
One structural difference: multi-year contracts. A 3-year, $300k deal contributes $300k of total contract value, but only $100k of ARR per year. Booking the full amount into ARR inflates growth and will surface later as a cliff — the kind of restatement that destroys credibility in diligence.
Frequently Asked Questions
What is ARR in SaaS?
ARR (Annual Recurring Revenue) is the annualized value of all active recurring subscriptions — what your recurring revenue base would produce over a full year. It excludes one-time setup fees, professional services, and non-recurring usage revenue.
How do you calculate ARR?
ARR = MRR × 12 for monthly-billed customers, plus the full annual contract value of yearly-billed customers. Only recurring contract value counts: exclude one-time fees, services, and unconverted trials.
What is a good ARR growth rate in 2026?
It depends on scale. Under $1M ARR, 100%+ growth is expected. At $10M, 60–80% is strong. At $50M, 40%+ keeps you top-quartile; at $100M+, aim for the Rule of 40 — growth rate plus profit margin above 40.
Related Terms
Churn Is Eating Your ARR
ARR growth is net new ARR minus churn. Find out how much of your annual base is leaking — and how close you are to net negative churn — with the free analyzer.