Annual recurring revenue (ARR) is one of the metrics used to measure your revenue growth. In this article, we will learn what ARR is, how it is calculated, and how you can improve it.
Before we define what ARR is, let us first know what revenue and recurring revenue are.
Hence, ARR is the expected amount generated by your company in a year (12 months time frame) in exchange for providing goods and services. Unlike monthly recurring revenue (MRR) that offers short-term insights, ARR gives a broader picture of the overall performance of your business.
If you are a growing Subscription as a Service (SaaS) company, you’re more likely to attract more investors if you have an excellent, predictable revenue like ARR. It will also make your board members more satisfied. Thus, ARR is an important metric to analyze your business and help you anticipate growth.
There are several ways on how to calculate ARR.
When your monthly recurring revenue (MRR) for all customers is available, the easiest way to calculate the ARR is by multiplying your MRR by 12, i.e.
ARR = MRR x 12.
If MRR is not available, then you first need to calculate the following:
After that, you can now compute the ARR using the formula below:
ARR = amount of annual subscriptions + amount of yearly additional ongoing revenue - yearly total loss due to cancellations.
Since ARR is a forward-looking metric, meaning it refers to ongoing or recurring revenue, we will exclude elements that are not recurring in nature. These elements can be one-time fees, set-up fees, non-recurring add-ons, etc.
It is also essential to note that each term should be calculated annually when using the above formula. Hence, when the unit of time is not in a year, you need to convert it first. Consider the following examples:
ARR = $150 x 12 months = $1800
ARR = $20,000/15 x 12 = $16000.
We divide first the total plan by 15 months to get the monthly revenue, then multiply it by 12 months.
ARR = $170,000
The training fee of $15000 is not included since it’s a one-time payment and not recurring in nature.
Are you satisfied with your current ARR? Do you think you can still improve it? I’m sure there is since everything always has room for improvement! Vaporware advises to always check these three levers:
You can maximize your ARR by tracking how it goes up and goes down. While it’s easy to calculate and create graphs for your ARR, it’s just one metric. To maximize the overall revenue, you still need to compute the other metrics. Lido can help you with that! It can build dashboards to monitor your data and compute different metrics like ARR. Try Lido by signing up here for free!