How SaaS Companies Turn Usage Revenue Into ARR | SaaS Metrics School | Usage Into ARR

Why It Matters

ARR remains the primary growth metric for SaaS investors and boards; using standardized, well-documented methods to annualize usage revenue reduces valuation risk and improves comparability across companies. Clear disclosure of methodology helps legitimize usage-driven ARR and informs investor due diligence.

Summary

In this SaaS Metric School episode Ben Murray outlines how usage-based software companies convert variable consumption revenue into an annual recurring revenue (ARR) metric. His research of public filings shows the two dominant approaches are trailing-period annualization—often using the prior quarter or prior month—and more granular monthly aggregation of committed and usage charges before multiplying by 12 (examples: Confluent and Datadog). Murray notes disclosure quality is improving and provides webinar slides with detailed definitions and company-specific calculations. He urges operators to adopt recognized methods so their ARR presentations align with investor expectations.

Original Description

How do SaaS companies convert usage revenue into Annual Recurring Revenue (ARR)? Let’s break it down in this episode of SaaS Metrics School, where SaaS operators come to level up their career and their business.

I’m Ben Murray, The SaaS CFO, and in this video, I’m diving deep into a topic that’s becoming increasingly important as more SaaS companies adopt usage-based pricing models — how to properly turn that variable or consumption-based revenue into a clean, defensible ARR number for your board, investors, and financial reporting.

💡 This video is based on a live webinar that maxed out its attendee limit, where I shared definitions, calculations, and real-world examples from public SaaS companies that disclose how they calculate ARR for both subscription and usage-based models. After 100 hours of manual research reviewing press releases, earnings calls, and SEC filings, I compiled the most common methods SaaS companies use to calculate ARR — and today, we’re focusing on the usage component.

🔍 What You’ll Learn in This Episode

♦ What usage-based revenue really means — and how it differs from traditional subscription MRR

♦ How public companies like Confluent and Datadog calculate ARR from consumption-based revenue

♦ The most common methods used to annualize variable revenue streams

♦ Why it’s critical to disclose your ARR methodology to investors and the board

♦ How to avoid “creative math” when presenting ARR from usage models

♦ The difference between quarterly annualized and monthly annualized methods

♦ How to blend subscription ARR and usage ARR for an accurate total figure

♦ Why some SaaS companies now treat ARR as their North Star metric for valuation and growth visibility

🧮 Real-World Examples

From my research:

✔ Confluent converts usage revenue into ARR by annualizing the previous quarter’s consumption — essentially taking three months of usage and multiplying by four. It’s a simple, transparent approach that gives investors a clear annualized run rate.

✔ Datadog uses a more complex formula that aggregates monthly revenue from committed contractual amounts plus usage, then annualizes that monthly total. This allows Datadog to report a blended ARR that includes both subscription and variable revenue.

While some might find these methods “too simple,” they’re widely used and accepted — especially when the company’s revenue base is diversified between committed and usage components.

📊 Why This Matters

If your SaaS company has a usage-based pricing model — whether that’s API calls, data processed, transactions, or seats consumed — you need a consistent, transparent methodology for converting that consumption into ARR.

ARR is the headline growth metric investors care about most. It helps:

♦ Benchmark your performance against public SaaS peers

♦ Communicate predictable revenue streams to investors

♦ Align your finance and GTM teams around a single growth metric

♦ Support stronger valuation narratives during fundraising or exit discussions

The trend is clear: more and more SaaS companies are disclosing their ARR calculation methodology, often calling it their North Star metric in investor materials. The key is consistency and clarity — no “creative” definitions, just a defensible, repeatable calculation that makes sense for your business model.

🧰 Want the Full Breakdown?

I’ve linked the webinar replay and PDF slides (nearly 60 slides) in the show notes below. In that session, I covered:

Webinar Replay & Slide Deck (~59 slides):

Get definitions, examples, and real ARR formulas from leading SaaS companies: https://www.thesaasacademy.com/offers/zz3ZR2WL

♦ ARR restatements and how AI SaaS companies define ARR

♦ Common ARR calculation errors

♦ The full dataset of public SaaS ARR definitions

You’ll also get access to my No Fluff Core Series inside my SaaS Metrics Foundation course — including the Metrics Module, where we go even deeper into ARR, MRR, and the full SaaS metrics stack.

📌 More Resources from Ben Murray – The SaaS CFO:

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If you’re building or operating a SaaS business with a usage-based model, understanding how to define, calculate, and communicate ARR correctly is essential. Watch the full video for insights, frameworks, and public benchmarks you can apply today.

See you in the next episode of SaaS Metrics School — where we cut the fluff and focus on what actually moves your SaaS business forward.

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