If you want to push your company to the next level and into the billion-dollar bracket, you must monitor key performance indicators. Why? Because it allows you to keep track of your business’s development, spot issues, assess customer feedback, and plan accordingly. There are so many metrics you need to keep tabs on, but if there’s one that’s crucial for your business, especially if you’re a SaaS company, it’s Annual Recurring Revenue.
Through this article, you’ll have a thorough understanding of what ARR actually entails. Keep on reading to find out more.
The total amount of money you expect to earn through the sales of your products and services from your customers in a given year is known as Annual Recurring Revenue. It’s a key metric for gauging your business’s financial health and profitability.
However, it is to be noted that for contracts with a duration of more than a year, ARR may differ from the sum stipulated in the subscription agreement. Total ARR is standardized on a yearly basis to account for subscriptions that span many years.
You can calculate ARR manually, which can take a while and is prone to mistakes. However, with sophisticated and accurate software like Sturppy, calculating ARR has been drastically simplified. The technique for making an ARR chart is the same whether you do it in the KPIs part of Sturppy or on the main dashboard.
Identifying all of your REGULAR revenue streams in Sturppy is the first step toward visualizing your ARR month over month. Keep in mind that the second R in ARR denotes “recurring”, therefore, ARR should only include regular income sources.
For your better understanding, let’s take the example of our favorite fictitious company, Slackr. If you’re interested in checking its live financial model within Sturppy, you can view it here.
The screenshot below demonstrates that all of Slackr’s revenue comes from subscriptions. They offer cloud-based teamwork tools as a service (SaaS) with monthly and annual subscription options available to customers.
For illustration, let’s add a visualization of ARR by month under the KPIs section. We’ll add the visualization as a new tab to the below chart for Revenue. Start by hovering the chart for Revenue with your mouse until the (+) symbol shows up, hover the (+) symbol and click on “Chart UI”.
From the “Chart UI” panel, click the folder + button at the top right to add a new tab to the chart. We’ll name it “ARR growth”.
All right, so now we only have to make up the logic, which is dead simple. Exit the chart’s user interface, hover the graph again until the plus sign appears, and then select “Datasource” from the menu that displays.
If the “Total Revenue” node isn’t already in your graph, you can add it by clicking the “Add new node” button in the top left and typing in the relevant search term; likewise, if your business has multiple revenue streams, only some of which are recurring, you should add all of the relevant output nodes for each revenue stream.
Click “Add new node” and add an input node, an operation node, and an output node. Connect your nodes like in the screenshot below, and boom — you’re almost done!
Use the breadcrumbs to go back to the KPIs page, hover over the chart once again, and access Chart UI. Next, click on the ARR growth tab, add a new series, and then select ARR from the dropdown as shown below.
Click out of the Chart UI, and you’re done! You now have a visualization of ARR growth by month for the entirety of your model.
With Sturppy, you can have your ARR computed in just a matter of minutes, freeing up time for you to concentrate on other core aspects of your business.
For startups, Monthly Recurring Revenue (MRR) is the preferred recurring revenue metric since it is more easily understood and applied, especially when contract terms are less than a year. The primary difference between the two is the time — ARR can be calculated by multiplying the MRR by 12. Additionally, MRR is mainly used to monitor operations, while ARR is more commonly used for valuation purposes.
Many startup owners will present annual recurring revenue to investors during fundraising or in board meetings to showcase overall business performance, whereas monthly recurring revenue demonstrates the company’s operational efficiency.
As a founder of an early-stage startup, you may find it challenging to think long-term. Any successful entrepreneur, however, will tell you that planning ahead is crucial to your business’s viability.
When calculating ARR, you should have your sights set on the future of your company. You can attain the above-mentioned growth metrics of 100% or more by maintaining a steady rate of expansion. However, how can we boost ARR?
Getting as many consumers through the door as possible is the simple solution, but there is more depth to the lengthy version. Maintaining satisfied clients is another priority. Having clients churn quicker than you can replace them can have a devastating effect on your ARR. Let’s examine several approaches that have been effective in lowering customer attrition and increasing average monthly revenue.
There’s no doubting the necessity of bringing in new customers to a thriving firm. However, not all methods for acquiring new consumers are equally productive. Obtaining high-quality clients who are a good fit for your product or service is critical to increasing your annual recurring revenue.
To accomplish this, you must first identify your ideal customer and then evaluate which channels would best communicate your marketing messaging to them. It also demands the funding of a sales staff capable of successfully closing business and networking with prominent decision-makers.
Never leave your customers stranded once they’ve purchased your products/services — if they feel ignored, they will jump ships and look for better alternatives, and there’s a huge probability that they will find a similar business that’s willing to go the extra mile.
Always listen to your customer’s queries and feedback. You must have a customer success team to ensure that your customers and your ARR are in good hands.
Customers who have an ARR commitment to a product for more than a year experience churn somewhat differently than those who do not. Although finance cannot reduce churn on its own, it can help the sales and customer success teams better understand “why” churn occurs by working together with those teams.
If the functionality of the product is the root cause of customer churn, the customer success team can collaborate with the product development group to determine which updates and changes should be prioritized. When it comes to addressing product/market fit, sales can do so by concentrating on what customers require and desire at the time of signing, and by ensuring that they continue to connect consumers to the appropriate services at the appropriate time.
Even if successes in the short term, such as incentives, could seem like fantastic wins early on, you should focus on the long game. Add-ons and upsells result in increased monthly recurring revenue (MRR), which in turn causes an increase in annual recurring revenue (ARR).
Other long-term choices include increasing prices for subscriptions after a predetermined amount of time (your year-over-year recurring revenue can climb dramatically if you incorporate a 5-10% annual increase into your subscription agreement) or raising the prices of your services as a whole (this is particularly important if you feel like your offerings are underpriced).
If your organization provides a variety of platforms, tiers of functionality, and more items, it will be much simpler for sales to upsell and cross-sell interested clients with new features and capabilities. The customer is required to make a commitment to the upgrades and add-ons for the entire period of the annual contract in order for them to be considered a part of ARR. Obviously, these upgrades and add-ons cannot be offered on a monthly basis.
The stability of your ARR over time indicates the long-term viability of your company and business plan. ARR is helpful since it demonstrates how much of your revenue is consistent rather than seasonal (which can happen with MRR). If these spikes aren’t repeated, you won’t be able to produce a sustained annual revenue increase.
However, because it only covers one year, ARR remains a static indicator. Make certain that the historical data in your ARR tells a story and that you investigate the “why” behind the figures.
Nevertheless, here are some of the potential benefits of measuring your ARR:
ARR is a long-term indicator that emphasizes the financial efficiency of your company at a high level and demonstrates to investors the strength of your top-line growth.
When it comes to raising capital, revenue projections play a crucial role since they show investors how the company plans to reach its growth goals and revenue projections. For long-term strategic management of your SaaS startup’s growth, you can combine bottom-up and top-down tactics employing the different forms of ARR and MRR with an ARR snowball.
Keeping track of your annual recurring revenue (ARR) will help you make informed decisions regarding upselling and cross-selling, as well as provide you with a better understanding of what your clients value the most.
Your ability to reinvest in your business grows in lockstep with your annually recurring revenue (ARR). Investments include both new employees and increased pay for existing ones, both of which are required for the company’s growth.
Variations in ARR demonstrate how satisfied customers are over time. Customers who renew their subscriptions or make further purchases on a regular basis show that they are content with the product and the market, but those who cancel or downgrade indicate that they have reservations.
The primary focus of an investor is on ARR because it is the industry standard. Investors are naturally drawn to recurring revenue sources because they occur on a regular basis. The sales model of a subscription firm with annual term contracts provides revenue predictability (a steady stream of income throughout the year, barring any opt-out or cancellation clauses). Naturally, the firm must demonstrate profitability and debt reconciliation statistics to keep investors engaged.
ARR offers a crucial context that enhances the interpretation of other key metrics, such as customer turnover rate and lifetime value. These statistics provide limited insight into a company's growth and profitability when considered in isolation. However, when combined with annual recurring revenue, a comprehensive and coherent picture of a company's financial health is revealed.
Finally, ARR is one of the metrics that may be used to assess a SaaS company’s potential to attract and retain investors by exhibiting continuous and scalable revenue and growth. You should try to increase your annual recurring revenue to maximize the value of your subscription business when it goes public or is purchased.
It’s crucial to comprehend the significance of Annual Recurring Revenue for your business. Monitoring this metric provides valuable insights into the financial performance of your company and helps you make informed decisions for future growth. Utilizing tools like Sturppy can simplify the process of tracking and analyzing your ARR, allowing you to gain a clear understanding of your revenue streams and make data-driven adjustments to your long-term strategies. Embracing technology and utilizing ARR tracking tools can give your business the competitive edge it needs to succeed in today’s fast-paced marketplace.