Net New ARR Formula 2026 New + Expansion - Churn - Contraction
The flow measure underneath the ARR balance. Four components: New from new logos, Expansion from existing accounts, Churn from cancellations, Contraction from downgrades. The sum is what investors actually evaluate when they look at the growth engine.
The formula
Net New ARR =
New ARR + Expansion ARR
- Churned ARR - Contraction ARR
Inputs
Gross positive
$1.80M
New + Expansion
Gross negative
-$500K
Churn + Contraction
Growth quality
72%
Moderate leakage
Net New ARR
$1.30M
The denominator of burn multiple. Higher = more efficient capital deployment.
The four components
| Component | Definition | Signal |
|---|---|---|
| New ARR | Annual recurring value of contracts signed with new logos in the period | Acquisition engine. Sales pipeline conversion + new market reach |
| Expansion ARR | Additional ARR from existing customers (upsells, seat adds, tier upgrades) | Product value delivery + account management effectiveness |
| Churned ARR | Annual value of cancelled subscriptions in the period | Product-market fit + retention. Most concerning signal at scale |
| Contraction ARR | Annual value of downgrades from existing customers (fewer seats, lower tier) | Pricing or packaging issues. Customer still values product but commits less |
Worked example: same total, different stories
Two companies report identical $1M net new ARR for a quarter. The waterfall reveals two completely different positions:
Company A: Clean engine
- New ARR+$800,000
- Expansion+$300,000
- Churn-$80,000
- Contraction-$20,000
- Net New ARR+$1,000,000
Strong acquisition, healthy expansion, low loss. The kind of waterfall investors fund eagerly.
Company B: Leaky bucket
- New ARR+$2,000,000
- Expansion+$200,000
- Churn-$900,000
- Contraction-$300,000
- Net New ARR+$1,000,000
Same headline, but $2.2M of gross movement is required to net $1M. Retention is broken. This pattern degrades fast.
Related
Frequently Asked Questions
What is the net new ARR formula?
Net New ARR = New ARR + Expansion ARR - Churned ARR - Contraction ARR. New ARR is the annual recurring value of contracts signed with new logos. Expansion ARR is the annual value of upgrades by existing customers. Churned ARR is the annual value of cancelled subscriptions. Contraction ARR is the annual value of downgrades. The sum is your true growth in recurring revenue for the period.
Why does net new ARR matter more than total ARR?
Total ARR is a stock measure (your balance at a point in time). Net new ARR is a flow measure (your change in balance). Investors use net new ARR to evaluate the growth engine because it isolates the productive movement of revenue from the inherited base. A company with $50M ARR and $1M net new ARR per quarter is shrinking on a flow basis even though the headline number looks impressive.
How does net new ARR relate to burn multiple?
Net new ARR is the denominator of burn multiple. Burn Multiple = Net Burn / Net New ARR. If net new ARR is $1M and net burn is $1.5M, burn multiple is 1.5x. Improving net new ARR (by closing more new logos, growing expansion, or reducing churn) directly improves burn multiple. This is why investors push founders to focus on net new ARR rather than gross new bookings.
What is the difference between net new ARR and net new MRR?
They are the same metric on different time bases. Net new MRR uses monthly recurring revenue movements; net new ARR annualises. Net new ARR = Net new MRR x 12 if your contracts are monthly. For mixed monthly and annual contracts, the cleaner approach is to track annual values directly. Most SaaS finance teams report MRR movements at the operations level and ARR movements at the board level.
Why include both contraction and churn?
Churn is the loss of an entire customer (subscription cancelled). Contraction is the loss of partial revenue from a customer who downgraded (fewer seats, lower tier, smaller usage commit). Both reduce recurring revenue. Treating them separately surfaces the distinction: a contraction signal often indicates pricing or packaging issues (the customer still values the product but at a smaller commit), while churn signals product or competitive failure.