Starting ARR is the ARR the value of your ARR 12 months prior to end date shown above.

ARR is recurring revenue, as defined by your revenue recognition policy, calculated on an annualized basis. ARR should not include the following: 1) one-time fees or professional services even if they are re-occurring; or 2) contracted but not yet live ARR.

Revenue associated with consumption or usage based pricing (UBP) may be included at your discretion, provided that they are truly recurring (even if variable) and reasonably predictable a quarter in advance. Importantly, if ARR from UBP is included in one period and goes away in the next, then the decline must be recorded as churn.

An important facet of ARR is that it is a measure at a point in time – much like a Balance Sheet item, as opposed to an Income Statement metric like Revenue.

New Customers is dollars of ARR booked from new logos in the 12 months up to the date shown above.

Such New Customer ARR bookings should exclude one-time fees, professional services, etc. Be sure to calculate the bookings on an ARR basis – multi-year deals only get credited for one year’s worth. Also, since “Upsells/Expansions” in our model only include bookings from entities who were already customers at the beginning of the period if you have newly acquired customers who quickly expanded their ARR within the period, you’ll need to include expansions in this New bucket (otherwise NRR won’t be correct).

Upsells/Expansions is dollars of ARR booked from existing customers who increased their commitments during the 12 months period.

The additions could come in a variety of forms, such as commitments for increased services, higher prices, more seats, etc. Note that, since we are measuring ARR bookings, be sure to exclude one-time fees, professional services, etc. Be sure to calculate the bookings on an ARR basis – multi-year deals only get credited for one year’s worth. Also, make sure to include the gross increases of all existing customers who have increased their commitments – do not net out the reductions (which will be covered separately in the gross churn). "Upsells/Expansions" in our model only include bookings from entities who were already customers at the beginning of the period. To the extent you have some newly acquired customers who quickly expanded their ARR in the period, you'll need to include expansions in the New bucket (otherwise NRR won't be correct).

Gross Churn measures the aggregate ARR reductions in the period from all existing customers who reduced or eliminated their commitments during the period. The reductions can come in the form of downsells, price reductions, complete cancellations, bankruptcies, etc. Note that churn in our model does not include churn from entities who were added in the period and quickly churned within the same period -- such changes should be netted out for this model to ensure NRR and GRR remain cohort-based, tying to entities who were customers at the beginning of the period. Gross Churn is directly tied to the GRR metric. Enter Gross Churn as a positive number – it will be subtracted in the waterfall.

Ending ARR is calculated as Starting ARR plus New Customers plus Upsells/Expansions minus Gross Churn and, in most cases, reflects the recurring revenue at the end of the period being measured. Exceptions include “inorganic” activity, such as M&A. For example, our calculation excludes ARR from an acquisition occurring in the period (and thus would be lower than your actual ending ARR). Similarly, our calculation includes ARR from a division divested or closed in the period (and thus would be higher than your actual ending ARR).

ARR Growth measures the annual growth rate of ARR in the period.

Bookings from New Customers is calculated as New Customer ARR Bookings divided by Total ARR Bookings (the sum of bookings from New Customers and Upsells/Expansions).

Net Revenue Retention (NRR) measures the percentage of recurring revenue retained over a one-year period from existing customers. NRR captures lost ARR due to customer attrition, reduced usage, or decreasing subscription level, offset by increased ARR from existing customers through up-sells, cross-sells, price increases, or increased usage. The term “net” is used because lost ARR is “netted” against expansion ARR. We calculate NRR as Ending ARR minus New Customer Bookings, divided by Starting ARR. Note that NRR is cohort-based, meaning we only include expansions/upsells from entities who were customers at the beginning of the period.

Gross Revenue Retention (GRR) measures the percentage of recurring revenue that is retained over a one year period. GRR captures lost recurring revenue due to customers leaving or lowering their usage commitments. In contrast with NRR, GRR only includes the effects of churned customers or lower revenue (down-sell) from existing customers, and therefore must be no greater than 100%. We calculate GRR as Starting ARR minus Gross Churn, divided by Starting ARR. Note that GRR is cohort-based, meaning we only include churn from entities who were customers at the beginning of the period. The effect of newly-added customers quickly churning intraperiod does not impact this GRR.

Sales & Marketing Spend is the total dollars spent on sales & marketing (S&M) coinciding* with the total bookings achieved (as provided in the Waterfall on the previous page). Be sure to include all S&M expenditures and not just those directly related to the successful bookings. As a starting point, look to GAAP accounting S&M for the same period. However, as much as possible, back out amortization of deferred commissions and stock-based compensation so that the number you provide here reflects the true cash costs. * If your sales cycles are long and you believe S&M costs from current periods don’t match up well with current bookings, you may consider using a modest “look back”, but use such adjustments conservatively and make sure they are applied consistently.

% Spent on New Customers is the proportion of S&M Spend that you attribute to efforts to gain New Customer Bookings in the period, as opposed to Upsell/Expansion Bookings. While many companies don’t have internal accounting systems that track their expenditures in this way, we urge you to approximate the split. Any S&M costs you attribute to customer success should be allocated to the Upsell/Expansion component, even if they relate to renewals.

Total New ARR Cost Ratio is equal to total S&M divided by Total ARR Bookings in the period and reflects the total S&M dollars spent per dollar of ARR achieved.

New CAC Ratio is equal to S&M directed at New Customer Bookings divided by New Customer ARR Bookings in the period and reflects the S&M dollars spent per dollar of ARR achieved for just the new customers in the period.

Upsell CAC Ratio is equal to S&M directed at Upsell/Expansion Bookings divided by Upsell/Expansion ARR Bookings in the period and reflects the S&M dollars spent per dollar of ARR achieved for just the upsells/expansions in the period.

Net New ARR Cost Ratio is equal to total Sales & Marketing spend divided by the Net New ARR in the period, where Net New ARR includes total ARR Bookings(new customer and upsell/expansion) minus the churn as outlined in the waterfall. For public companies, we remove stock-based compensation expense from Sales & Marketing since it can distort the ratio for some companies in some periods.

ARR Gross Margin is equal to the gross profit margin (revenues minus cost of goods/services sold, divided by revenues) which the company achieves on its ARR when such ARR is ultimately recognized as revenues.

Free Cash Flow (FCF) is equal to cash provided from operations minus capital expenditures — as reported on the statement of cash flows, for the period. Change in cash due to financing should be ignored.

Avg. Number FTEs is equal to the average number of employees and other “full-time-equivalent” staff working for the company in the period.

FCF Margin is equal to Free Cash Flow in the period divided by the average ARR in the period.

EBITDA Margin is equal to EBITDA in the period divided by the average ARR in the period.

EBITDA is equal to Earnings Before Interest, Taxes, Depreciation, Amortization, & Stock-Based Compensation for the period.

Rule of 40 is equal to the Free Cash Flow margin plus the annual ARR Growth rate in the period.

ARR per FTE is equal to average ARR in the the period divided by the average number of FTEs in the period.

S&M Payback Period is equal to the total Sales & Marketing spend in the period divided by the product of 1) the Net New ARR Bookings in the period and 2) the Subscription Gross Margin. We then multiply by 12 months to express the time period in months. This number reflects the time it takes — generating gross profit dollars —- to “pay back” the S&M costs, across net new bookings, including new customers, upsells/expansions and churn.

ACV or Average Annual Contract Value is the average amount paid per year across all of your current customers. Despite the name, please use the “median” rather than the average (so that a few large customers don’t throw off the number). Also, to the extent you have many customers using a low-priced product which doesn’t account for much of your total revenues, then ignore this part of the equation. In other words, choose the ACV that you believe reflects where most of your customers, at scale, sit.

PLG or SLG? If 67% or more of your new ARR Bookings comes from customers who started using or trying your product before speaking with a rep, through either a free trial or free plan, then select PLG-Dominated. If less than 33%, select SLG-Dominated. Otherwise, select Combination

UBP % of ARR is the approximate percentage of your ARR that is derived from revenues from usage- or consumption-based pricing, which can more readily go up or down.

To see the definition and edit this figure, please go to the GTM page.

Research & Development expense less stock-based compensation for the period.

General & Administrative expense less stock-based compensation for the period.

S&M % of ARR is equal to S&M defined earlier divided by the average ARR in the period.

R&D % of ARR is equal to R&D defined above divided by the average ARR in the period.

G&A % of ARR is equal to G&A defined above divided by the average ARR in the period.