The Key Differences between ARR and NRR

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In SaaS busi­ness­es, you see a lot of acronyms. This arti­cle focus­es on two spe­cif­ic acronyms: ARR and NR. They are often used in the same con­text but have very dif­fer­ent mean­ings. I’ll cov­er the dif­fer­ences between ARR and NRR, what each met­ric means, and why they’re impor­tant.

ARR stands for annu­al recur­ring rev­enue.

NRR stands for net recur­ring rev­enue.

Let’s dis­cuss what each one means and in what con­text you’d use them.

ARR (Annual Recurring Revenue)

ARR, or annu­al recur­ring rev­enue, refers to a spe­cif­ic dol­lar (or oth­er cur­ren­cy denom­i­na­tion) amount of your rev­enues that came as a result of some kind of sub­scrip­tion or recur­ring con­trac­tu­al oblig­a­tion.

Here’s an exam­ple:

Let’s say your SaaS start­up gen­er­at­ed $20 mil­lion in rev­enues in your last fis­cal year.

  • $12 mil­lion of that rev­enue was from soft­ware sub­scrip­tions.
  • $4 mil­lion of that rev­enue was from trans­ac­tion fees asso­ci­at­ed with your ser­vice. (Think: an SMS tex­ting soft­ware ser­vice where your cus­tomers pay a fixed amount per month to access the ser­vice and a per-mes­sage fee for each mes­sage sent. The per-mes­sage fee would be con­sid­ered “trans­ac­tion rev­enue.”)
  • $4 mil­lion of that was con­sult­ing fees to help new cus­tomers migrate to your tech­nol­o­gy.

In this exam­ple, your busi­ness would have $12 mil­lion in ARR, or annu­al recur­ring rev­enue, for the pri­or fis­cal or cal­en­dar year (depend­ing on the time­frame one ref­er­ences or implies with their usage of the term).

Some­times, a com­pa­ny will make a fore­cast of the annu­al recur­ring rev­enue.

An exam­ple might be:

Last year, we gen­er­at­ed $12 mil­lion in ARR. For this com­ing year, we are on pace to hit $17.5 mil­lion in ARR for the full cal­en­dar year. We also have an ARR run rate of $24 mil­lion for the full cal­en­dar year.

In this con­text, “on pace to hit $X mil­lion in ARR” is a fore­cast of the results that man­age­ment thinks they will hit by the end of the year.

In this con­text, “ARR run rate” typ­i­cal­ly refers to the most recent­ly com­plet­ed month’s month­ly recur­ring rev­enue, or MRR, mul­ti­plied by 12 (months).

The “on pace to hit $X mil­lion in ARR” and the ARR run rate will dif­fer for com­pa­nies that are either grow­ing or shrink­ing quick­ly.

For a giv­en cal­en­dar year in a grow­ing busi­ness (with­out any weird sea­son­al­i­ty), Jan­u­ary sales are usu­al­ly low­er than Decem­ber sales. The full cal­en­dar year expect­ed or fore­cast­ed ARR is based on the com­bi­na­tion of each month’s month­ly recur­ring rev­enue added up. A full-year fore­cast would include the actu­al MRR for the months that have already tran­spired and an esti­mate of the expect­ed MRR for the remain­ing months of the year. Adding up each month’s actu­al or esti­mat­ed rev­enue from recur­ring con­tracts gives the expect­ed or fore­cast­ed ARR.

Your month­ly rev­enues for the cur­rent year might look like this:

NRR vs. ARR Data Table

Your forecasted/estimated/expected ARR would be the recur­ring rev­enue actu­al­ly gen­er­at­ed or expect­ed to be gen­er­at­ed in each month of the year. In this case, the fore­cast­ed ARR would be $17.5 mil­lion.

The ARR run rate takes the most recent month’s rev­enue from recur­ring con­tracts and mul­ti­plies it by 12. So, if your com­pa­ny did $2 mil­lion in recur­ring rev­enue in Decem­ber of the year in ques­tion, $2 mil­lion x 12 months = $24M ARR run rate. “We expect to hit a $24M ARR run rate in Decem­ber of this cal­en­dar year.”

NRR (Net Recurring Revenue)

NRR, or net recur­ring rev­enue, is a type of finan­cial analy­sis used to assess two key capa­bil­i­ties of a com­pa­ny:

  1. Abil­i­ty to retain cus­tomers (and pre­vent them from “churn­ing” out of the busi­ness)
  2. Abil­i­ty to upsel­l/cross-sell exist­ing cus­tomers

When cus­tomers and their rev­enues “churn,” this reduces rev­enue for the busi­ness.

When cus­tomers are upsold or cross-sold addi­tion­al prod­ucts and ser­vices, this increas­es rev­enue for the busi­ness.

These two fac­tors off­set each oth­er. The NRR, or net recur­ring rev­enue, met­ric is used to assess which of these off­set­ting fac­tors is larg­er.

Do more cus­tomers leave than can be off­set by the upsell­s/cross-sells from the cus­tomers who remain? Or did the oppo­site occur?

NRR is mea­sured in per­cent­ages.

An NRR of 120% means that when you take base­line rev­enues (which I’ll define in a moment) at the start of the analy­sis peri­od (typ­i­cal­ly 12 months), sub­tract churned rev­enue, and add in upsell­s/cross-sells, the rev­enues at the end of the analy­sis peri­od are 20% high­er than those at the start of the peri­od.

An NRR of 100% means that when you take base­line rev­enues at the start of the analy­sis peri­od, sub­tract churned rev­enue, and add in upsell­s/cross-sells, the rev­enues at the end of the analy­sis peri­od are exact­ly the same as those at the start of the peri­od.

An NRR of 80% means that when you take base­line rev­enues at the start of the analy­sis peri­od, sub­tract churned rev­enue, and add in upsell­s/cross-sells, the rev­enues at the end of the analy­sis peri­od are 20% low­er than those at the start of the peri­od.

Below is the for­mu­la for cal­cu­lat­ing NRR, or net rev­enue reten­tion, for a giv­en 12-month peri­od (can be for a cal­en­dar year or the pri­or 12 months, such as March 2023 to Feb 2024).

Net Recurring Revenue Formula

When to Use ARR vs. NRR (and Why)

Because ARR is mea­sured in dol­lars (or euros), you use ARR when you want to see how big a com­pa­ny is (regard­less of whether the growth comes from new cus­tomer acqui­si­tion, keep­ing exist­ing cus­tomers, or sell­ing more to exist­ing cus­tomers).

A com­pa­ny with $1 bil­lion in ARR is sub­stan­tial­ly larg­er than a com­pa­ny with $10 mil­lion in ARR.

You use NRR when you want to see how well a com­pa­ny retains cus­tomers and upsell­s/cross-sells to the cus­tomers it retains. This is an incred­i­bly use­ful met­ric for deter­min­ing if you have a busi­ness that is effec­tive at keep­ing and grow­ing exist­ing cus­tomers. How­ev­er, because NRR is mea­sured in per­cent­ages (com­par­ing Month 12 rev­enues to Month 1 rev­enues), NRR does not tell you about the size of a com­pa­ny.

For a com­pa­ny with an NRR of 140%, you have no idea if the com­pa­ny has $10 mil­lion or $1 bil­lion in sales. You just know they’re real­ly, real­ly good at keep­ing cus­tomers and sell­ing more to them.

What NRR does tell you is the growth poten­tial of a busi­ness. A busi­ness with 140% NRR that can keep per­form­ing at that lev­el will even­tu­al­ly be a very large busi­ness. You just can’t tell from NRR alone if they are at the start of that growth tra­jec­to­ry or much fur­ther along.

As an exam­ple, most uni­corn SaaS com­pa­nies (busi­ness­es with a mar­ket val­u­a­tion over $1 bil­lion) often have an NRR in the 140% range.

Ven­ture cap­i­tal firms that spe­cial­ize in growth-stage busi­ness­es and pri­vate equi­ty firms that invest in or buy com­pa­nies capa­ble of explo­sive growth look at NRR to deter­mine the business’s growth poten­tial.

These same enti­ties look at ARR to see how big the com­pa­ny is and whether or not the com­pa­ny size is with­in the range of their invest­ment cri­te­ria.

(For exam­ple, many pri­vate equi­ty firms are pro­hib­it­ed from invest­ing in com­pa­nies with less than $10 mil­lion ARR or more than $X ARR. This is typ­i­cal­ly deter­mined by the firm’s invest­ment strat­e­gy and the size of its fund. They don’t want to put their entire fund into a sin­gle invest­ment for a com­pa­ny with ridicu­lous­ly high ARR. At the same time, they don’t want to invest in too many small firms, as it’s the same amount of work to invest in a $1 mil­lion ARR com­pa­ny as it is a $10 mil­lion ARR com­pa­ny.)

To see how NRR impacts future rev­enue growth via charts and graphs, see my arti­cle: Net Rev­enue Reten­tion — Why it Mat­ters a Lot

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Vic­tor Cheng
Author of Extreme Rev­enue Growth, Exec­u­tive coach, inde­pen­dent board mem­ber, and investor in SaaS com­pa­nies.
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