Juliana — Sales & GTM expert
ARR tells you how big your revenue base is today; NRR tells you whether that base is growing or shrinking on its own. A SaaS company with $5M ARR and 115% NRR is compounding without adding a single new customer. One with $5M ARR and 88% NRR is leaking faster than it can fill the bucket. Both metrics are essential — but they answer completely different questions, and confusing them leads to bad forecasting decisions.
- ARR (Annual Recurring Revenue) is the annualised value of all active subscriptions at a point in time — it measures the size of your revenue base.
- NRR (Net Revenue Retention) measures how much of last year's ARR you still have this year from the same cohort, including expansion and contraction — it measures the health of that base.
- NRR above 100% means your existing customers are expanding faster than they churn; the benchmark for top-quartile B2B SaaS is 120%+.
- Investors weight NRR heavily at Series B and beyond because high NRR means growth is partially self-funding — new logo acquisition matters less.
- For SDRs and sales teams, understanding ARR and NRR shapes how you prioritise accounts: high-NRR companies spend more on software, which makes them better targets.
What is ARR and how is it calculated in SaaS?
Annual Recurring Revenue (ARR) is the annualised value of all active subscription contracts at a given point in time. It is a snapshot metric — it tells you the run-rate revenue your business would generate over 12 months if nothing changed.
The ARR formula is straightforward:
ARR = (Total value of active subscription contracts) ÷ Contract length in years
In practice: a customer paying $2,000/month on a monthly plan contributes $24,000 ARR. A customer on a $60,000 two-year contract contributes $30,000 ARR per year. Professional services revenue, one-time setup fees, and usage overages that are not contractually recurring are excluded — ARR is about predictable, committed revenue only.
ARR is most useful as a growth tracking metric. Month-over-month ARR growth shows whether your new business motion is working. It is also the denominator in many SaaS efficiency metrics: ARR per employee, ARR per dollar of S&M spend, and magic number all use ARR as the base.
What is NRR (net revenue retention) and why does it matter?
Net Revenue Retention — sometimes called Net Dollar Retention (NDR) — measures what percentage of your ARR from a prior period you still have at the end of a subsequent period, after accounting for expansion, contraction, and churn within that same customer cohort.
The NRR formula is:
NRR = (Starting ARR + Expansion ARR − Contraction ARR − Churned ARR) ÷ Starting ARR × 100
Example: you start January with $1,000,000 ARR from 50 customers. Over 12 months, those same customers expand by $120,000, some downgrade by $40,000, and two cancel for a combined $30,000 loss. Your NRR is ($1,000,000 + $120,000 − $40,000 − $30,000) ÷ $1,000,000 × 100 = 105%.
An NRR above 100% is often called
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