ARR growth rate
DEFINITION
ARR growth rate is the percentage change in a subscription business's annual recurring revenue over a period, usually one year, comparing ending ARR to beginning ARR.
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ARR growth rate is the percentage change in a subscription business's annual recurring revenue over a period, usually one year. It compares ending ARR to beginning ARR and expresses the difference as a rate, showing how fast the recurring revenue base is expanding or contracting. As a single figure, the growth rate is the headline measure of momentum for a subscription business, but the number behind it is built from several moving pieces: new ARR from new customers, expansion ARR from existing customers, and the ARR lost to contraction and churn. Two companies can post the same growth rate for very different reasons, so the rate is most useful when read together with its components. A subscription platform such as Recurly tracks the new, expansion, and churned ARR that combine into the net change, which makes the drivers of the rate visible rather than just the result.
Why ARR growth rate matters for subscription businesses
ARR growth rate is the metric most often used to judge the trajectory of a subscription business. It compounds, so a rate sustained over several years produces very different outcomes than the same rate held for one. Investors, boards, and operators use it to compare performance across periods and against plan. It matters for a few reasons:
It measures momentum in a way a raw ARR figure cannot, since a rate is comparable across companies of different sizes.
It anchors planning and valuation, because expected future growth drives how a subscription business is valued.
It exposes the balance between acquisition and retention, since sustained growth is hard to hold on new sales alone if the base is churning.
How to calculate ARR growth rate
The growth rate is the net change in ARR over the period divided by the ARR at the start. ARR growth rate = (Ending ARR - Beginning ARR) / Beginning ARR x 100 An equivalent form built from the components makes the drivers explicit: Net new ARR = New ARR + Expansion ARR - Churned ARR - Contraction ARR ARR growth rate = Net new ARR / Beginning ARR x 100 Where:
Beginning ARR is annual recurring revenue at the start of the period.
Ending ARR is annual recurring revenue at the end of the period.
New ARR is annualized recurring revenue from new customers.
Expansion ARR is added recurring revenue from existing customers.
Churned and contraction ARR are recurring revenue lost to cancellations and downgrades.
To calculate it:
Record ARR at the start of the period.
Record ARR at the end of the period.
Subtract beginning ARR from ending ARR to get net new ARR.
Divide net new ARR by beginning ARR.
Multiply by 100 to express it as a percentage.
Illustrative example (hypothetical figures):
Beginning ARR: $5,000,000
Ending ARR: $7,500,000
ARR growth rate = (7,500,000 - 5,000,000) / 5,000,000 x 100
= 2,500,000 / 5,000,000 x 100
= 50%
The same 50 percent could be built from components: $2,000,000 in new ARR plus $1,000,000 in expansion minus $500,000 in churn equals $2,500,000 in net new ARR, which over a $5,000,000 base is again 50 percent.
How to use ARR growth rate
Measure the rate over a consistent period, and pick the period that matches how the business is run. A year-over-year rate smooths seasonality, while a quarter-over-quarter rate catches turning points sooner. Always look under the rate at its components, because a high rate driven by new sales into a churning base is far less durable than the same rate driven by expansion. Ways to use it:
Break growth into new, expansion, and churned ARR to see what is driving it.
Compare the rate to plan and to prior periods to spot acceleration or slowdown.
Pair it with net revenue retention, since strong retention lets growth compound rather than leak away.
Benefits and examples
Watching ARR growth rate keeps a business focused on durable, compounding revenue rather than one-time wins. Because the rate is comparable across sizes and periods, it is a common language for the board, the finance team, and investors, and breaking it into components turns it from a scoreboard into a diagnosis. For example, a company that grows from $5,000,000 to $7,500,000 in ARR posts 50 percent growth. If most of that came from expansion within the existing base, the growth is likely to continue as those customers keep expanding. If it came entirely from new sales while churn quietly rose, the same headline rate would be far harder to repeat the following year. The rate tells the score; the components tell whether it will hold.
Frequently asked questions
What is the difference between ARR growth rate and net new ARR? Net new ARR is the dollar change in ARR over the period. ARR growth rate expresses that same change as a percentage of beginning ARR, which makes it comparable across companies of different sizes.
Should ARR growth rate be measured yearly or quarterly? Either works, and many businesses track both. A year-over-year rate reduces the effect of seasonality, while a quarter-over-quarter rate reacts faster to changes in the business.
What is a good ARR growth rate? It depends heavily on company size and stage, since smaller companies typically grow faster in percentage terms.
Does ARR growth rate include expansion revenue? Yes. ARR growth captures the net change in the base, which includes new customers, expansion from existing customers, and losses from churn and contraction. Expansion is part of what drives the rate.
