Annual Recurring Revenue (ARR)

January 3, 2023 2023-01-31 6:35

Define ARR (Annual Recurring Revenue)

Annual recurring revenue (ARR) is a metric used by subscription-based businesses to measure and forecast their revenue based on yearly subscription.

ARR gives businesses a clear understanding of their recurring revenue streams and can be used to make informed decisions about pricing, product development, and marketing. It is also a helpful metric for investors, as it provides insight into the health of a company’s business model.

Uses of Annual Recurring Revenue in detail

There are a number of ways that companies can use Annual Recurring Revenue, or ARR, to measure and improve their business performance. Here are a few examples:

1. Companies can use ARR to measure their growth

ARR provides a clear way to track whether a company is growing or shrinking. If a company’s ARR is increasing, it means that the company is adding more customers and generating more revenue from them on a recurring basis. This is a strong indication of growth.

2. Companies can use ARR to set goals

ARR can be used as a goal-setting tool. Companies can use their current ARR as a benchmark and set goals to increase it by a certain percentage over time. This provides a clear and measurable way to track progress towards growth goals.

3. Companies can use ARR to track customer churn

Customer churn is a key metric for subscription-based businesses. ARR can be used to track customer churn by measuring the percentage of customers who cancel their subscriptions each month. This provides a clear way to track whether a company is losing customers and whether its customer retention efforts are working.

4. Companies can use ARR to assess the health of their business

ARR can be used as a key metric to assess the overall health of a company. A healthy company should have a high ARR, low customer churn, and strong growth. If a company’s ARR is low or declining, it may be a sign of trouble.

5. Companies can use ARR to benchmark their performance

Companies can use ARR to benchmark their performance against other companies in their industry. This provides a way to see how a company’s ARR stacks up against its competitors and can be a useful tool for setting goals.

Importance of Annual Recurring Revenue

Annual recurring revenue (ARR) is a measure of a company’s expected revenue that will recurring annually. This figure is important to investors and analysts because it provides insight into a company’s growth potential and ability to generate revenue on a consistent basis. ARR is also a helpful metric for comparing companies within the same industry.

How to calculate ARR?

ARR (Annual Recurring Revenue) calculation can include the following:

  • Income generation from new, current, and recurring customers
  • Upgradation of services and addiction services
  • Revenue loss from downgrading and reduction in customer relation

ARR Calculation:

By dividing the total subscription value with the number of relative years. Example, if a customer subscribes for 2 years and the amount for subscription is $14,000 then by dividing $14,000 (amount of subscription) by 2 (the no of years) the ARR for year is $7,000 per year.

In case the customer declines to renew the subscription of $7,000 over 2 years then by dividing $7,000 with 2 you get the decrease of ARR per year (i.e.) $3,500.

ARR does not include any variable cost like one time charges, only fixed cost of subscription is included. In case any extra non-subscription charges are added onto ARR its accuracy decreases.

How can you grow ARR?

To run a successful SaaS or subscription business, brands and marketers must focus on growing their ARR. With ARR growth, scalability and sustainability will come in the product and business.

  1. Find the right channel to grow: While keeping your primary objective of growth in mind, make sure you select the right channels to grow your ARR and product in the market. This could be investing more in paid ads, SEO, social media, influencer marketing collaborations, or cold outreach.
  2. Promoting annual plans: Annual plans simply help adding more revenue to your business. Resulting in growth of the ARR number and your measuring metric.
  3. Upsell your clients: Try to upsell your higher value plans and products to the existing clients you have. Provide more value and unlock more features for them with bigger plans. You can also cross-sell related products in your line up and grow your revenue.
  4. Improve customer retention: Try to engage more with your existing customers and optimize the UX of your product to keep your users on your platform. Revenue loss saved is also revenue earned.