Growing ARR is about Problem-Market-Fit and Growing NRR is about Product-Market-Fit

In my work with early-stage companies, I've developed a perspective on the growth of annual recurring revenue (ARR) versus net recurring revenue (NRR) and how each reflects a company's market fit. This distinction has been particularly important to me in my roles as a board member and company advisor.

From my point of view, growing ARR is fundamentally about establishing Problem-Market-Fit. ARR growth is driven by the successful identification and resolution of a significant problem within a specific market. At this stage, the emphasis is on thoroughly understanding the pain points of your target customers and ensuring that your solution effectively addresses these issues. Achieving Problem-Market-Fit involves rigorous market research, customer discovery, and iterative product development to confirm that the problem you're solving is both real and urgent. When a company reaches Problem-Market-Fit, it indicates that there is a clear demand for the solution, and the market is willing to pay for it. This represents a crucial step in product maturity, enabling initial traction, customer acquisition, and the foundation for ARR growth. Companies that have attained Problem-Market-Fit typically see their ARR grow as they onboard more customers eager to solve the specific problem their product addresses.

On the other hand, NRR growth is about establishing Product-Market-Fit. NRR reflects how well your product continues to deliver value to your customer base over time. It measures the ability of your product to retain and expand within your existing customers, considering upgrades, cross-sells, and churn. Product-Market-Fit occurs when your product meets the market's needs so well that customers continue to use it, renew their subscriptions, and even expand their usage. This alignment is demonstrated by high retention rates and a growing share of wallet from your existing customers. A high NRR indicates that your product not only addresses the initial problem but also continues to provide value, leading customers to stay engaged and often invest more. This is a strong indicator of sustainable growth and a product that is well-aligned with the market's needs and expectations.

In summary, ARR growth is about identifying and solving a critical market problem (Problem-Market-Fit), while NRR growth focuses on delivering ongoing value that keeps customers engaged and invested (Product-Market-Fit).

What is your perspective on this distinction between growing ARR versus NRR?