What is Net New ARR?
Net New ARR measures the total change in your recurring revenue over a period. It's the complete picture: new customer revenue plus expansion minus contraction and churn.
This is the metric that shows whether your business is actually growing. You can have great new sales but still shrink if churn exceeds new business.
Why Net New ARR Matters
Net New ARR is the truest measure of growth momentum. It accounts for all the forces pushing revenue up (new and expansion) and down (contraction and churn).
Tracking the components reveals where to focus. If Net New ARR is flat despite strong new sales, you have a retention problem. If it's growing slowly despite low churn, you need more pipeline.
How to Calculate Net New ARR Step by Step
Step 1: Set your time period. Net New ARR is typically measured monthly or quarterly. Choose the period and pull subscription data from both the beginning and end.
Step 2: Categorize every ARR change into four buckets. Go through your billing system and classify each change:
- New ARR: Customers who signed their first contract this period
- 8 new customers × average $24,000 ACV = $192,000
- Expansion ARR: Existing customers who upgraded, added seats, or increased usage
- 12 customers expanded → $96,000
- Contraction ARR: Existing customers who downgraded or removed seats
- 5 customers contracted → $36,000
- Churned ARR: Customers who cancelled entirely
- 3 customers churned → $72,000
Step 3: Apply the formula.
- Net New ARR = $192K + $96K - $36K - $72K = $180,000
Step 4: Calculate the composition. Understanding where growth comes from matters as much as the total:
- New customer contribution: $192K (67% of gross additions)
- Expansion contribution: $96K (33% of gross additions)
- Gross additions: $288K
- Gross losses: $108K (38% loss-to-addition ratio)
If losses exceed 40% of additions, you're working too hard to grow.
Step 5: Annualize and project. If this quarter's Net New ARR was $180K, your annualized pace is $720K. Compare that to your starting ARR to get an implied growth rate.
- Starting ARR: $2,400,000
- Annualized Net New ARR: $720,000
- Implied growth rate: 30%
Common mistakes founders make:
- Counting signed contracts that haven't started (those are bookings, not ARR)
- Not annualizing monthly changes (a $10K/mo new contract is $120K new ARR)
- Double-counting expansion that's already reflected in MRR
- Mixing up gross new ARR (just new customers) with Net New ARR (all four components)
Components of Net New ARR
Break it down: New ARR (first-time customers), Expansion ARR (upgrades and add-ons), Contraction ARR (downgrades), and Churned ARR (cancellations). Each component tells a different story.
Formula
Net New ARR = New ARR + Expansion ARR - Contraction ARR - Churned ARR
Ending ARR = Beginning ARR + Net New ARR
Example
Q1 ARR movements:
- Beginning ARR: $2,000,000
- New customer ARR: $300,000
- Expansion ARR: $150,000
- Contraction ARR: $50,000
- Churned ARR: $100,000
Net New ARR = $300K + $150K - $50K - $100K = $300,000
Ending ARR = $2,000,000 + $300,000 = $2,300,000
15% quarterly growth, driven primarily by new sales.