Annual Recurring Revenue (ARR)

Annual recurring revenue (ARR) is a common topic at SaaS board discussions and provides the starting point for most SaaS financial planning and analytics (FP&A) projections. However, it can be easy to confuse ARR in the SaaS context with a couple of other financial metrics that share the same acronym (“annual run rate” and “accounting rate of return”). So, let’s clarify.

In this article, we’ll discuss why ARR is an important metric for SaaS companies, the different types of ARR you need to know, and how to calculate them. We’ll also look at how ARR differs from generally accepted accounting principles (GAAP) revenue. 

What is a good ARR? 

Generally speaking, it’s hard to find reliable benchmarks for ARR because ARR growth rate offers a better measure of velocity, momentum, and future potential than any fixed revenue number. 

However, we did find some data on median ARR based on a company’s age in SaaS Capital’s 2025 Private B2B SaaS Company Growth Rate Benchmarks report. The median ARR values in the table below are approximated from the information in Figure 6 of the report.

These numbers get us a little closer to answering the question, “What is a good ARR?” But there’s an important caveat here for using them as benchmarks for your business. The values reported in the study reflect median ARR reported from all the companies surveyed, blending the results for bootstrapped companies together with those that are equity-backed. 

The report notes that equity-backed companies grow significantly faster (and therefore accumulate ARR faster) than bootstrapped ones, especially for those at the under-$5M ARR stage. So, if your company is equity-backed, the median ARR shown in the table will likely understate where your well-funded peers might be sitting.

So maybe the better question is, “What is a good ARR growth rate?” 

How to calculate ARR growth rate and interpret the results

ARR growth rate measures how quickly your recurring revenue is increasing year over year. It reflects the combined impact of new customer acquisition, expansion revenue, and retention performance.

It also provides context that absolute ARR can’t. For example, a company with $5M ARR growing at 100% is might be viewed as more attractive than a $10M company growing at 10%. This is because the growth rate shows momentum and future potential. These are factors investors prioritize heavily when investing in a SaaS.

Here’s how to calculate ARR growth rate: 

ARR growth rate = (Current ARR - Previous ARR) / Previous ARR * 100

Given the heavy emphasis on growth in the SaaS industry, it’s not surprising that many studies have attempted to determine ideal SaaS growth rates. We’ve provided results from a few of them here. The most common way of reporting ARR as a growth metric is by grouping companies into ARR revenue bands. Some provide ARR growth as a range, while others provide a median or the top quartile (75th percentile). 

The ARR growth rates in the figure below were reported in the SaaS Capital study referenced above and illustrate that, while ARR and company age are directly correlated, ARR growth rate and company age are inversely correlated. In other words, older companies have higher ARR, but they grow more slowly.

However, the report attributes much of the difference in growth rates to the “denominator effect” used in the growth rate calculation. This happens when dividing by a small base number (i.e., the lower ARRs used to define smaller companies), which can produce large percentages, even from modest absolute gains. 

The denominator problem: why growth rates naturally decline as you scale

Maintaining a high ARR growth rate becomes difficult as your company grows because it’s calculated as a percentage of your existing revenue base. When that base is small, even modest gains translate into high growth rates.

For example, growing from $500,000 to $1M in ARR represents 100% growth. But growing from $10M to $15M results in just 50% growth, despite a much larger absolute increase.

This is why early-stage companies often report triple-digit growth, while more mature companies see growth rates decline over time. Of course, this doesn’t indicate weaker performance. It simply reflects the math behind percentage-based growth.

This dynamic is critical to understand before you benchmark your performance against peers. Remember, a lower growth scale can still represent strong execution, especially when it’s accompanied by meaningful increases in absolute ARR.

ARR growth rate benchmarks

Benchmarkit's 2025 B2B SaaS Performance Metrics Report reveals the following ARR growth benchmarks, based on company stage:

• Less than $1M ARR: 100%
• $1M–$5M ARR: 45%
• $5M–$20M ARR: 27%
• $20M–$50M ARR : 15%
• $50M–$100M ARR: 10%
• Over $100M ARR: 6%

The most current data from High Alpha provides global benchmarks for SaaS companies with less than $1M in ARR to more than $50M, and suggests that the median represents “good” ARR growth and that companies in the 75th percentile are achieving “great” growth. 

Below are the most current YoY ARR growth benchmarks reported by ICONIQ. They reflect ARR growth for the companies in the top quartile (75th percentile). The data for this study was drawn from both public SaaS companies and ICONIQ’s private venture and growth portfolio. 

Like the other studies, ICONIQ’s results show the same pattern: smaller companies appear to grow faster than larger ones. However, the report also noted that, while established startups (those older than one year) show very high growth rates in the early years, they begin to stabilize around year 10. 

How ARR compares to other revenue-related metrics

ARR is one of the most widely used metrics in SaaS, but it loses its effectiveness without sufficient context. To fully understand your company’s performance, you must compare it with other revenue-related metrics, especially those grounded in accounting standards or focused on retention and profitability.

Each metric answers a different question. ARR shows the annualized value of your recurring revenue, while other metrics like retention rates and profitability KPIs provide additional context on how that revenue is recognized and sustained.

ARR vs. revenue

Revenue is the total value of income earned from delivering all goods or services, while ARR accounts for just subscriptions. Revenue is a generally accepted accounting principles (GAAP) term, which applies to money coming into your business from services that have, for the most part, already been rendered. In contrast, ARR is not. A SaaS company can earn revenue through the following channels:

• Revenue from subscriptions
• Revenue from consulting fees
• One-time payments such as installation and onboarding fees

GAAP revenue is the sum of these three items, while ARR is just the first. As a result, ARR is often lower than total revenue. However, it can exceed recognized revenue depending on contract structure and timing.

The following table illustrates the major differences between ARR and revenue:

ARR vs. contracted ARR

ARR and contracted ARR represent different views of your revenue. ARR reflects the recurring subscription revenue your business is currently generating, normalized to a one-year period. It typically includes only active subscriptions and excludes revenue from contracts that have not yet started.

Contracted ARR (CARR), on the other hand, represents the total value of recurring revenue that has been contractually committed, regardless of whether the contract has started. This can include future-dated contracts or signed agreements that will begin generating revenue in future periods.

The differentiating factor here is timing.

ARR shows revenue you’re earning today, while contracted ARR provides a forward-looking view of revenue that’s already secured but not yet realized. Because of this, contracted ARR is often higher than ARR and is commonly used for forecasting and pipeline visibility, while ARR is used for reporting current performance.

ARR vs. deferred revenue

ARR is a non-GAAP operational metric that measures active, ongoing revenue in your business. Deferred revenue is a GAAP accounting concept that represents cash you’ve already collected for services you haven’t delivered, distinguishing between revenue actually earned vs. future revenue. It appears as a liability on your balance sheet until revenue is recognized over time.

The key difference lies in timing and recognition.

Let’s say you’re a SaaS company that sells a two-year subscription for $24,000 with annual billing of $12,000. 

When your customer pays $12,000 upfront the first year, that $12,000 is recorded as deferred revenue. As you deliver the service each month, $1,000 is recognized as revenue, and the deferred revenue decreases by the same amount. 

At the end of the first year, the deferred revenue will be $0, and ARR will remain $12,000. When the customer pays $12,000 for year two, the deferred revenue will “reset” to $12,000, and the pattern will repeat, with deferred revenue decreasing by $1,000 each month as services are delivered. 

In contrast, the ARR for that contract will remain constant at $12,000 for the life of the active subscription because it doesn’t reflect any concept of revenue recognition, only the revenue from active contracts. 

A somewhat subtle nuance here is that while monthly subscribers contribute to ARR, that revenue carries little or no deferred revenue because they pay month-to-month. So for businesses with a mixed customer base, the two figures can look very different for structural reasons beyond just timing.

ARR vs. NRR

Unlike ARR, net retention revenue (NRR) focuses specifically on how your existing customer base is performing over time. It measures how much recurring revenue you retain from existing customers, including the impact of expansion and churn, but excluding any new customers.

The difference between ARR and NRR is one of perspective—how you want to evaluate your revenue. ARR represents your total recurring revenue, while NRR isolates the growth or decline within your current customer base.

For example, a company with 120% NRR is generating more revenue from its existing customers than it started with, even after accounting for churn and downgrades. This may indicate strong product value and expansion opportunities. On the other hand, ARR alone doesn’t reveal much about whether your revenue growth is coming from new customers or existing ones.

ARR vs. GRR

ARR and gross retention revenue (GRR) answer different questions. ARR shows your total recurring revenue at a point in time, while GRR isolates the stability of your existing customer base.

ARR includes all sources of recurring revenue, including new customers, expansions, renewals, churn, and contractions to give you a comprehensive overview of the revenue base and overall growth.

GRR focuses only on how much revenue you retain from existing customers over a given period. So, it excludes expansion revenue and accounts only for losses due to churn and contraction.

For example, a company can grow ARR through strong new sales and upsells, even if it’s losing revenue from existing customers. GRR helps uncover this by measuring how much of your starting revenue is retained before any expansion.

ARR and GRR are complementary metrics—ARR tells you how fast you’re growing, GRR tells you how well you’re retaining and whether growth is sustainable in the long term.

ARR vs. EBITDA

ARR is a top-line metric. It shows how much predictable revenue your business is generating. On the other hand, earnings before interest, taxes, depreciation, and amortization (EBITDA) measure profitability. It accounts for both revenue and operating expenses to show efficiently that your business is generating earnings.

Both of them focus on different things. ARR tells you how much recurring revenue you have, while EBITDA tells you how much of that revenue translates into profit. Because of this, a company can have a high ARR but low (or even negative) EBITDA if it’s investing heavily in growth through sales, product development, etc.

This means you can use ARR to track growth and forecast revenue, but to evaluate operational efficiency and financial health, you need to look at EBITDA.

ARR vs. revenue run rate

ARR is based only on contracted, predictable revenue streams and excludes one-time or non-recurring income. 

Revenue run rate is an extrapolation of your current revenue over a given period, typically calculated by taking figures of a recent month or quarter and projecting them forward over a year.

The difference lies in what’s being annualized.

ARR annualizes only recurring subscription revenue, while run rate annualizes total revenue based on recent performance. Unlike ARR, run rate may include non-recurring revenue.

Think of a company that generates $1M in revenue in a quarter. Its annualized run rate would be $4M. But if a portion of that revenue comes from one-time deals or services, the run rate would overstate the company’s predictable revenue base. ARR, by contrast, would include only the recurring portion of that revenue.

For this reason, ARR is considered more reliable when assessing predictable revenue and long-term performance, while run rate is more useful for quick estimates.

ARR vs. gross ARR vs. net ARR

Because ARR reflects the annualized value of recurring revenue at a specific point in time, it offers a snapshot of recurring revenue that already reflects the cumulative effects of churn, contraction, and expansion.

Gross ARR and net ARR can lend more detail to the recurring revenue picture by showing what’s happening within a given period, depending on how they’re defined.  

Gross ARR generally refers to recurring revenue before churn and contraction are factored in for a given period. It’s useful for evaluating sales performance and gross revenue momentum, but it overstates realized recurring revenue because it doesn’t account for losses during the period.  

It’s important to note that gross ARR is not a standardized metric and can vary by company. Depending on how a company defines it, it may refer to the starting ARR for a period or to the total value of recurring revenue additions before losses are factored in. 

Starting ARR is simply the ending ARR from the prior period carried forward. It's the baseline before anything happens in the current period (i.e., no new bookings, no churn, no expansion). So it provides a clean opening balance.

When companies define their gross ARR as the total recurring revenue additions before losses, it means they’re adding up all the new and expansion ARR generated during the period (and in some cases, renewals), without subtracting churn or contraction. Defined in this way, gross ARR can actually be higher than starting ARR because it's stacking new activity on top without subtracting anything.

There’s no right or wrong definition. The difference just means it’s important to know how a company defines gross ARR in order to accurately interpret it. 

Net ARR isn’t standardized either. It’s typically defined as the recurring revenue remaining after churn, contraction, and expansion are accounted for. It usually aligns with ending ARR for a period. Since it reflects how much revenue the business actually kept for the period, it’s useful for assessing retention and revenue durability.

To sum it up, gross ARR shows recurring revenue before losses are applied, net ARR shows recurring revenue after all the changes are apple, and ARR shows the recurring revenue base at a specific point in time.

SaaS ARR reporting

Tracking and reporting ARR is about understanding what’s driving the changes you see in your recurring revenue over time. 

Most SaaS companies use an ARR waterfall (or ARR bridge) to track how ARR moves between reporting periods. An ARR waterfall breaks down changes in ARR into the key components (e.g., new ARR, expansion ARR, renewal ARR, churned ARR, and contraction ARR).

This means an ARR waterfall report helps you see the drivers behind any growth or decline in revenue. Here’s how waterfall reports help:

• Reveal whether growth is coming from new customers, expansion, or pricing
• Qualify the impact of churn and contraction
• Detect “revenue leaks” that may not be obvious from top-line ARR alone
• Build more accurate forecasts using historical revenue movements

Click on the video below to see what a waterfall report looks like.

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To make your waterfall reports actionable, make sure you use a consistent ARR definition in terms of what it includes and how it’s calculated. Break it out by product, segment, or anything else you believe is important to see what’s driving your ARR. Then, track movements regularly to identify trends in churn or expansion early.

How technology simplifies ARR analysis and tracking

If you have a relatively simple pricing model for your SaaS, such as a price based on the number of licenses sold, then tracking your ARR may be relatively straightforward. 

However, tracking ARR becomes much more challenging with the more complex pricing models increasingly prevalent in the SaaS industry today. Such models use a combination of pricing factors for which the data resides on different platforms and is difficult to consolidate. 

The best way to track ARR is to use a financial reporting software or a comprehensive FP&A platform that can connect your ARR and other SaaS metrics into your financial planning processes and make reporting easier. 

Both types of software significantly streamline ARR analysis and tracking with automated waterfall charts that are always up to date and robust reporting capabilities, including revenue reporting dashboards, to give you a more holistic view of your business. 

ARR is a core SaaS metric that plays a critical role in financial projections. Tracking it on an ongoing basis is key to unlocking powerful insights that you can leverage for faster growth.