What is the difference between net new ARR and gross new ARR?
Gross new ARR is everything you added. Net new ARR is what you added minus what you lost. Only one of them explains why your ARR balance moved.A company can add $6 million of gross new ARR in a year and grow its base by $2 million. The other $4 million filled holes left by churned customers and downgrades. Both figures are correct, they answer different questions, and presenting only the first is how a retention problem stays invisible for three quarters.
Gross new ARR is a measure of go-to-market output. Net new ARR is a measure of business growth. Sales leadership tends to report the first. The board is asking about the second, whether or not it says so.
What is gross new ARR?
Gross new ARR is the total recurring revenue added in a period, before any subtraction for losses. It has two sources.New customer ARR is recurring revenue from logos that were not customers at the start of the period. New product ARR and increased product ARR are the expansion components, covering existing customers who bought an additional product or increased their commitment on something they already had.
Splitting expansion into those two pieces is worth the effort. A customer adding a second product is a different signal than a customer buying more seats of the first one. The first suggests the platform is landing. The second suggests the original use case is scaling. They forecast differently and they are sold differently.
Gross new ARR is the honest measure of what your acquisition and expansion motions produced. It is also the number most sales dashboards default to, which is the problem.
What is net new ARR?
Net new ARR is gross new ARR minus churned ARR and contraction, and it equals the change in your ARR balance for the period. That identity is the reason it matters.Losses come in three forms. Churned customer ARR is a customer who left entirely. Churned product ARR is a customer who dropped one product but stayed. Product decrease ARR is a customer who reduced quantity or downgraded a tier without dropping anything outright.
Keeping those separate changes what you do about them. A customer who dropped a single product has a product problem. A customer who cut seats by 40 percent has a value or a budget problem. A customer who left entirely often had both, and usually showed signals in one of the smaller categories first.
How does the ARR waterfall connect the two?
A monthly ARR waterfall reconciles beginning ARR to ending ARR through every component, and it is the only structure where both numbers can be checked against each other. The categories ORM uses are below.| Line | Category | Direction |
|---|---|---|
| Beginning ARR | Prior month ending ARR | Base |
| New customer ARR | Expansion | Add |
| New product ARR | Expansion | Add |
| Increased product ARR | Expansion | Add |
| Churned customer ARR | Contraction | Subtract |
| Churned product ARR | Contraction | Subtract |
| Product decrease ARR | Contraction | Subtract |
| Ending ARR | Result | Base for next month |
Gross new ARR is the sum of the three add rows. Net new ARR is that sum less the three subtract rows. Gross revenue retention and net revenue retention both fall out of the same chart, which is why running it monthly beats rebuilding retention analysis quarterly from scratch.
What does it mean when gross new ARR grows and net new ARR does not?
It means your acquisition engine is funding replacement instead of growth, and the installed base is leaking faster than the dashboard shows. Consider two years side by side.| Component | Year 1 | Year 2 |
|---|---|---|
| Beginning ARR | $18,000,000 | $22,000,000 |
| New customer ARR | $4,200,000 | $5,100,000 |
| Expansion ARR | $2,100,000 | $2,400,000 |
| Gross new ARR | $6,300,000 | $7,500,000 |
| Churned ARR | $1,600,000 | $3,900,000 |
| Contraction ARR | $700,000 | $2,300,000 |
| Net new ARR | $4,000,000 | $1,300,000 |
| Ending ARR | $22,000,000 | $23,300,000 |
The pattern usually starts with contraction rather than churn. Customers downgrade before they leave, and downgrades are easy to categorize as a routine renewal adjustment. Tracking product decrease ARR as its own line makes the trend legible a quarter or two before it turns into churned customer ARR.
Which number belongs on which dashboard?
Sales runs on gross new ARR because that is what it controls. The executive team runs on net new ARR because that is what ties to the plan. Both should be visible in the same review.Quota and comp for new business reps reasonably reference gross new ARR from new logos. Holding a new-logo rep accountable for a churn event in an account they never touched creates the wrong incentives. Account management and customer success carry expansion and retention, measured against the base they own.
The failure mode is when nobody owns the delta. If sales reports gross, CS reports a satisfaction score, and finance reports ending ARR, the gap between gross and net has no owner and no forum. Put net new ARR on the same slide as gross new ARR every month, with the six waterfall components underneath it.
How does this change the forecast?
Forecast the components separately, because they behave differently and respond to different conditions. A single growth rate applied to total ARR will be wrong in both directions at once.New customer ARR forecasts from pipeline, which means it inherits every weakness in pipeline data. Coverage ratios in the 3x to 5x range are the standard, and across ORM customers most sit near 3.5x, but coverage alone will not tell you what closes. Expansion ARR forecasts from installed base characteristics and usage patterns rather than from pipeline. Churn and contraction forecast from account health signals, and the earliest of those signals arrive well before a renewal date.
That separation is also what makes forecast accuracy measurable in a useful way. Accuracy on new and expansion behaves differently from accuracy on renewals, and a blended number hides which half of the model needs work. Our guide on how to forecast revenue covers how to stack the layers, and net revenue retention is the summary statistic that tells you what the base will do before a single new deal closes.
Gross new ARR tells you whether the engine is running. Net new ARR tells you whether the car is moving.
Frequently Asked Questions
What is the difference between net new ARR and gross new ARR?
Gross new ARR is everything you added in a period, from new customers and from expansion inside existing accounts. Net new ARR takes that total and subtracts churned ARR and contraction. Gross new ARR measures what the go-to-market engine produced. Net new ARR measures how much of it survived contact with the existing base, and it is the number that ties to the change in your ARR balance.
How do you calculate net new ARR?
Net new ARR equals new customer ARR plus expansion ARR minus churned ARR minus contraction ARR. It also equals ending ARR minus beginning ARR for the same period. If those two calculations disagree, your ARR waterfall has a reconciliation problem, usually a customer classified as churn in one place and contraction in another.
Can net new ARR be negative while gross new ARR grows?
Yes, and that combination is the most dangerous pattern in a subscription business. Sales can post record gross additions while churn and downgrades exceed them, leaving ARR flat or falling. The sales dashboard shows a strong quarter and the ARR balance does not move. Reporting only gross additions hides this for as long as it takes someone to check the ending balance.
Which number should sales be compensated on?
New business reps are typically paid on gross new ARR from new logos, because they do not control renewals. Account managers and CS teams carry the expansion and retention side. The executive team should run on net new ARR, because that is the only figure that reconciles to the ARR balance and to the plan. Paying everyone on gross additions guarantees nobody owns the leak.
What is a healthy ratio of net new to gross new ARR?
The ratio depends on the size of your installed base relative to new bookings, so a single benchmark misleads. A useful internal read is the trend. If net new ARR is falling as a share of gross new ARR quarter over quarter, retention is deteriorating and your gross additions are increasingly funding replacement rather than growth.
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