FA-201a · Module 1

ARR Decomposition

3 min read

Annual Recurring Revenue is not one number. It is four: new ARR, expansion ARR, contraction ARR, and churned ARR. Every forecast that treats ARR as a single line item is hiding the dynamics underneath. A company growing ARR at 40% could be adding $8M in new business and losing $2M to churn — or adding $12M in new business and losing $6M to churn. The net number is the same. The health of the business is completely different.

ARR Bridge (Q1 → Q2):
  Starting ARR:          $12,000,000
  + New ARR:              $2,100,000
  + Expansion ARR:          $840,000
  - Contraction ARR:       ($360,000)
  - Churned ARR:           ($780,000)
  ─────────────────────────────────────
  Ending ARR:            $13,800,000
  Net New ARR:            $1,800,000

  Gross Retention:  94.5%  (1 - churn/starting)
  Net Retention:   105.0%  (1 + (expansion-contraction-churn)/starting)

Do This

Decompose ARR into four components: new, expansion, contraction, churn
Track gross retention and net retention separately — they tell different stories
Build the ARR bridge monthly and compare actuals to forecast

Avoid This

Report "ARR grew 15%" without showing the components underneath
Combine contraction and churn into one number — contraction is recoverable, churn is not
Ignore expansion revenue in forecasts — for mature SaaS, expansion often exceeds new business