What is Net New ARR?
Net New ARR (Annual Recurring Revenue) is a key metric for subscription-based businesses that shows how much new recurring revenue you’ve added over a given period, typically monthly or quarterly. It takes into account revenue from new customers, upgrades, expansions, and cross-sells, while subtracting any losses from downgrades or cancellations.
In simpler terms, Net New ARR gives you a clear picture of how much fresh recurring income your business is bringing in after factoring in any customer churn.
Why is it Important to Measure Net New ARR?
Tracking Net New ARR is important because it gives you a real sense of how your business is growing. By focusing on new revenue coming in and accounting for any losses, you can see whether your efforts to gain new customers and expand existing accounts are paying off.
It’s also a key indicator of long-term sustainability. A positive Net New ARR shows that your business is not only bringing in fresh revenue but also offsetting any churn or downgrades. This helps you gauge whether you’re on track to meet growth targets, improve forecasting, and make smarter decisions around sales and customer retention strategies.
How Do you Calculate Net New ARR?
Calculating Net New ARR is fairly straightforward. Here’s the formula:
Net New ARR Formula
(New ARR + Expansion ARR) – (Churned ARR + Downgrade ARR)
- New ARR: This is the recurring revenue added from new customers during the period.
- Expansion ARR: This is the additional revenue from existing customers who upgraded or expanded their subscriptions.
- Churned ARR: This is the lost recurring revenue from customers who canceled or stopped their subscriptions.
- Downgrade ARR: This is the reduction in recurring revenue from customers who downgraded their subscriptions to a lower-tier plan.
By applying this formula, you get a clear picture of how much new recurring revenue you’ve gained, net of any losses, showing how effectively you’re growing over time.
How To Improve Net New ARR
Improving Net New ARR performance involves focusing on both acquiring new customers and maximizing revenue from your existing customer base, while minimizing losses from churn and downgrades. Here are a few strategies to help boost Net New ARR:
- Increase New Customer Acquisition: Invest in marketing and sales efforts to generate more qualified leads and close new deals. This could involve refining your sales process, improving your messaging, or expanding into new markets to attract fresh customers.
- Focus on Customer Expansion: Encourage existing customers to upgrade or purchase additional products or services. This can be done by offering premium features, add-ons, or demonstrating how an upgrade could bring more value to their business.
- Improve Customer Retention: Reducing churn is key to improving Net New ARR. Make sure customers are getting value from your product by providing excellent customer support, onboarding, and ongoing engagement. Proactively address any issues that might lead to cancellations.
- Offer Downgrade Prevention Strategies: Prevent downgrades by offering flexible pricing plans or discounts for customers considering a lower-tier subscription. Regularly review customer usage and offer solutions that fit their evolving needs.
- Enhance Product Offering: Continuously improving and innovating your product can lead to higher customer satisfaction, more upgrades, and reduced churn. Introducing features that better solve customer problems can create opportunities for expansion ARR.
By combining efforts across these areas, businesses can drive growth and improve their overall Net New ARR performance.
