Annual Recurring Revenue (ARR)

ARR = sum of all active subscription monthly values × 12. Key rules for accuracy: exclude one-time setup fees, exclude professional services (non-recurring), and prorate partial-year contracts. Multi-year contracts should be divided into their annual component — a $300k 3-year contract adds $100k ARR, not $300k. ARR is a snapshot metric (often reported end-of-period) as well as a flow metric — teams report New ARR, Expansion ARR, Contraction ARR, and Churned ARR within a period to explain the beginning-to-ending change. Product Ops and Finance collaborate to maintain the ARR model, connecting it to the CRM where contract values and dates are first recorded.

ARR changes through five mechanisms: (1) New ARR — new customer contracts signed. (2) Expansion ARR — upsells, cross-sells, and seat additions from existing customers. (3) Contraction ARR — downgrades reducing contract value. (4) Churned ARR — cancellations removing the contract entirely. (5) Reactivation ARR — previously churned customers restarting a subscription. Net New ARR = New + Expansion + Reactivation - Contraction - Churn. This "ARR waterfall" analysis is essential for understanding the health of revenue momentum — a company growing ARR but losing ground on churn may be on a treadmill.

ARR waterfall analysis drives resource allocation for CS and Support teams. High churn ARR in a specific segment triggers a task force investigation and potentially a CS coverage model change. Expansion ARR signals show which customer segments and product areas are generating growth — CS Ops uses this to identify the characteristics of accounts that expand, enabling proactive expansion programs. Support Ops uses ARR tiers (how much ARR a customer represents) to justify differentiated SLA tiers — enterprise contracts with $500k ARR warrant higher-touch support than SMB contracts at $3k ARR.