The 6 types of ARR you must know and why
Here are the different types of ARR you must know and why they matter.
1. New ARR – This is ARR generated from new subscriptions, which helps you assess how well you’re on track with your new business development. It is the total ARR from new customers. As such, it is sometimes also referred to as “New Logo ARR” or “New Business ARR”.
2. Expansion ARR – This is ARR gained from subscription upgrades via upsells and cross-sells, which tells you the impact those efforts specifically are having on your revenue. Calculating and then drilling down into what is driving your expansion ARR can help you improve it and other metrics as well. For example, the additional revenue from expansion ARR increases the lifetime value (LTV) of your customers and your net retention rate (NRR). And, because selling more services to existing customers doesn't add to your customer acquisition cost (CAC), it also improves your LTV:CAC ratio—a key indicator of your sales efficiency.
3. Renewal ARR – This is ARR generated from renewed subscriptions. For SaaS companies, the subscription model provides the basis for business growth. Renewal ARR (also known as Retention ARR) is a predictor of customer satisfaction. It’s also an indicator of future growth because it represents your ability to deliver long-term value to your customers, which helps to generate more revenue without adding to your CAC.
4. Churned ARR – This type of ARR measures the revenue lost from customers canceling their subscription or choosing not to renew (the logo is lost). Churned ARR can indicate a number of things. Churn can be an indicator of customer satisfaction. For example, an increasing number could mean your customers aren’t happy with some aspect of your product, something you might be able to address. Or, it could be that the customer has simply found a cheaper alternative.
5. Contraction ARR – This type of ARR represents any type of reduction in what the customer was previously paying, which could include plan downgrades, one/more canceled licenses or seats, or usage-based reductions. (Contraction ARR should not be confused with “Contracted” ARR, which reflects contractually guaranteed annual recurring revenues.)
6. Resurrected ARR – ARR gained from subscribers who canceled subscriptions but signed back up during the time period. Resurrected ARR (also known as Reactivation ARR) can indicate a couple different things. Reaching out to your resurrected customers to find out why they came back is a good idea because it can reveal insights into what it might take to win back previous customers.