ARR in SaaS companies explained: 2025 guide to boost growth

Anyone in a SaaS business knows you need to track how much money you're making each year from customers who stick around. The metric that does this is called ARR, and in the SaaS world, it's one of the most important numbers tracking your business growth.

What is ARR in SaaS companies?

ARR in SaaS firms stands for annual recurring revenue. It’s the normalized yearly value of your active subscription contracts. It measures predictable, subscription‑based revenue only. It leaves out one‑time fees and services. 

ARR is the annualized version of MRR, or the sum of recurring components like new, expansion, renewal, minus churn and contraction. 

Note: Want a short primer on the term itself? Read more about ARR's meaning.

ARR formula and how to calculate ARR

Here’s a quick look at the ARR formula:

ARR = MRR × 12 

Use this when you track monthly recurring revenue cleanly. Exclude one‑time fees. 

ARR formula (component view): 

ARR = New ARR + Renewal ARR + Expansion ARR − Churned ARR − Contraction ARR (some teams also track Reactivation ARR) 

This approach makes the drivers explicit.

Before we jump into tables, we have to clarify what counts and what does not, so your annual recurring revenue SaaS metric stays consistent. What to count vs. exclude:

• Count: recurring subscription fees, recurring add‑ons, contracted usage minimums or true‑up amounts that are expected to recur, and multi‑year deals normalized per year.
• Exclude: one‑time onboarding, setup, implementation, professional services, perpetual licenses, non‑recurring add‑ons.

Quick examples to make this concrete:

• Straight annual plan: 200 customers × $1,200 per year = $240,000 ARR.
• Upgrades and churn: Start ARR $500,000; + $70,000 expansion, − $30,000 churn → $540,000 ARR.
• From MRR to ARR: MRR $40,000 → $480,000 ARR.
• Multi‑year normalization: 3‑year $150,000 contract contributes $50,000 ARR.

Usage‑based plans need one extra rule: Count the committed minimum in ARR. Treat pure overage as ARR only if contracted to recur; otherwise, report it as non‑recurring revenue even if it happens often. 

Note: For a full comparison of monthly and annual views, see MRR vs. ARR.

What is a good ARR growth rate?

Median SaaS companies grow about 30% per year, while top‑quartile companies grow roughly 60–70%. Best‑in‑class early‑stage teams can exceed 100%. ChartMogul’s public benchmarks back these ranges.

How to use this: Track ARR growth rate monthly and quarterly. Break growth into New, Expansion, Renewal, Churn, and Contraction so that you can see which motion carries your results. Then set targets by stage and segment rather than a single company‑wide number. 

ARR vs. MRR vs. ACV vs. TCV

This quick table helps you avoid blind spots.

Quick rule: ARR shows your annualized run rate, while ACV and TCV describe deal size and term. Use all three to keep your ARR reporting accurate and useful. 

Note: If ACV and TCV blur together, compare ACV vs. ARR and ACV vs. TCV in our dedicated posts. 

What is an ARR multiple?

It is Enterprise Value ÷ ARR. Investors use ARR valuation multiples to compare subscription businesses on an apples‑to‑apples basis. Ranges vary by growth, margin, retention, capital efficiency, and market climate. 

Bessemer’s Cloud 100 report shows the average revenue multiple fell to ~20× in 2025, while AI companies average ~24×. The big takeaway is steady multiple dispersion by quality of growth, not size alone.

Before you apply any multiple, set expectations with a simple two‑step filter so comps stay honest:

• Segment comps by growth and NRR bands before using EV/ARR.
• Cross‑check with EV/Revenue if ARR definitions differ across peers.

ARR reporting: The checklist

Define ARR once, then apply it consistently. A short policy and tight reconciliation prevent disputes and rework. When finance, RevOps, and sales share one playbook, your annual recurring revenue SaaS metric stays clean. Use this checklist to keep reporting tight:

• Document the ARR definition. Write what counts and what does not in a one‑page policy.
• Normalize multi‑year contracts to annual values.
• Track components: New, Renewal, Expansion, Churn, Contraction.
• Exclude one‑time fees across all dashboards.
• Reconcile ARR to revenue monthly to catch mis‑categorized items.
• Break down ARR by cohort (segment, plan, industry) to diagnose drivers.
• Align sales and finance on ACV vs. ARR so quota credit does not distort reporting.
• Audit quarterly: Spot‑check 10 to 20 contracts for consistent treatment.

Note: For a broader measurement framework, bookmark our SaaS metrics guide.

Operationalize the ARR metric: Dashboard and cadence

Numbers drive value when they shape decisions. Use a simple cadence and a lightweight dashboard so ARR in SaaS turns into action across finance, sales, and product. Use this weekly, monthly, and quarterly cadence:

• Weekly: Review new ARR, expansion ARR, and churned ARR deltas. Flag accounts with SaaS usage spikes or drops and route them to CS for upgrade or save plays.
• Monthly: Close the books, reconcile ARR reporting to recognized revenue, and publish your ARR growth rate against plan. Compare actuals to targets by segment and by product, then assign owners for gaps.
• Quarterly: Re‑validate your ARR definition and “counts vs. excludes” policy with RevOps and finance. Calibrate internal ARR valuation multiples using a consistent comp set so board packets tell a coherent story.

Build a minimal ARR dashboard that leaders will actually read:

• ARR formula and policy: One line that states the rule you use (“MRR × 12” plus components) and what you exclude.
• ARR growth: Show TTM and the last three months, then break growth into New, Renewal, Expansion, Churn, and Contraction.
• Leading indicators: Top three SaaS usage signals that precede upgrades, plus the next‑90‑days renewal calendar by segment.
• Efficiency view: Add ACV per rep, win rate, and sales cycle so pipeline choices connect to the ARR metric.
• Valuation context: Keep a one‑row view of your internal EV/ARR estimate and the range from your comp set to ground conversations about “what is a good ARR” at your stage, not a generic target.

ARR in sales: How teams use it day to day

Sales leaders use ARR to size territories, set quotas, and plan capacity. Pipeline reviews should separate new logo ARR from expansion ARR so coverage and enablement match the work ahead. CS and sales should share one view of renewal ARR at risk to protect the base.

Keep your sales motions aligned with ARR:

• Tie compensation to a mix of new ACV and expansion ARR.
• Trigger upgrade playbooks from SaaS usage milestones and feature adoption.
• Report ARR in sales by segment and product, not only by rep.

7 practical strategies to increase ARR growth

You can grow ARR without guesswork. Start with moves that tighten price‑to‑value, surface expansion signals, and protect renewals. Measure gains by the ARR component so you know what to scale next.

1. Get pricing current: Audit price‑to‑value gaps, simplify tiers, and align features with buyer jobs. For usage motions, introduce committed‑use minimums with fair overage.
2. Make expansion obvious: Add clear upgrade paths in the product. Bundle premium features that correlate with retention. Train CS to spot expansion signals early.
3. Shift the contract mix: Nudge monthly plans to annual with modest discounts. Negotiate multi‑year with annual prepay where budget cycles allow.
4. Reduce avoidable churn: Fix failed payments, onboarding drop‑off, and gray churn from silent non‑users. Reactivate recent churn with clear comeback offers.
5. Tighten ICP and channel focus: Prioritize segments with higher NRR and lower payback. Pause channels that add logos without expansion.
6. Build a value review rhythm: Quarterly executive reviews that tie usage to outcomes protect renewals and surface upsell doors.
7. Instrument adoption and pricing experiments: Run pricing and packaging tests on subsets. Scale what works and revert what does not.

Common pitfalls when managing ARR

Most ARR headaches are avoidable. They come from fuzzy definitions, hidden contraction, or the wrong treatment of variable usage. Use this quick list to spot and fix issues.

• Mixing one‑time and recurring revenue
  
  • Fix: Codify a counts vs. excludes list and enforce it in your data model and dashboards.
• Ignoring downgrades
  
  • Fix: Track contraction ARR separately so it does not hide under churn.
• Treating usage overage as recurring by default
  
  • Fix: Include overage in ARR only if contracted to recur; otherwise, treat it as non‑recurring revenue.
• Over‑reliance on new business
  
  • Fix: Grow Expansion ARR through adoption programs and value reviews.

FAQs

1. What is ARR in SaaS?

ARR is annual recurring revenue, the annualized value of your active subscriptions after upgrades, downgrades, and churn. It excludes one‑time items like setup and services.

2. How do you calculate ARR?

You calculate ARR by multiplying MRR × 12, or sum New + Renewal + Expansion − Churn − Contraction. Normalize multi‑year deals to one year. 

3. How is ARR different from revenue?

ARR is different from revenue because the revenue metric includes recurring and non‑recurring income. ARR covers recurring subscription value only. Use both for a full picture.

4. What is a good ARR growth rate?

A good ARR growth rate is a median of ~30% per year, top quartile ~60% to 70%, and best‑in‑class early‑stage rates can exceed 100%. Stage and ARPA matter.

5. What is an ARR multiple?

An ARR multiple is the Enterprise Value ÷ ARR. Market context can shift the ranges, but leaders can trade at premium levels.

Boost ARR growth with Orb

Orb is the billing platform that equips you to design and operate pricing systems that evolve with your product. Business teams can define metrics, adjust pricing, and keep invoices accurate as plans change. Here’s how Orb helps:

• It’s for non‑technical teams: Evolve pricing without engineering thanks to Orb RevGraph, which decouples usage data from pricing logic. This means pricing isn’t hardcoded, making it possible for non-technical teams to make changes without relying on engineering.
• Define billing metrics without code: Orb ingests raw usage events so that you can define billable metrics in the Orb SQL Editor or a visual editor.
• Price with confidence: Orb Simulations uses your historical data to simulate how different models affect revenue and usage before launch. Orb enables forecasting so that finance and product departments make more informed decisions together.
• Operate at scale: A scalable API and raw event architecture ingest and process high‑volume data with accuracy, and keep invoices transparent and fully auditable as pricing changes.
• Reduce billing errors: By calculating from raw data and decoupling usage from pricing metrics, invoices are automatically recalculated as you evolve pricing, so bills remain accurate.
• Move faster on pricing changes: With the Orb SQL Editor and a visual editor, you can evolve pricing without rewriting code.
• Sync your stack: Direct integrations help keep usage and revenue data in sync across systems, so reports match what customers see.
• Awareness for growth: Orb’s reporting combines pricing, product usage, and customer data so that you can segment accounts and target expansion more effectively.

Ready to see how Orb can help you keep a high and growing ARR? Explore Orb’s flexible pricing options to find a plan that works for you and get started.