SEO Glossary: ARR (Annual Recurring Revenue)

 

Definition of ARR: What is Annual Recurring Revenue?

Annual Recurring Revenue (ARR) represents a proportion of a company's turnover. This is revenue that is generated regularly and continuously. As Software-as-a-Service companies in particular have multi-year contracts and subscriptions, it is not surprising that ARR is primarily used as a key figure in this area.

 

In order to obtain a meaningful value, you should take various factors into account. When determining the ARR, it is not only relevant how high the sales achieved are. Renewed, terminated or concluded contracts also play a role. Upgrades and downgrades should also be taken into account.

 

After all, the ARR varies depending on how many customers use your subscriptions. Some take out new contracts, while others let their contracts expire. One-off expenses and fees are not included in the calculation of the ARR.

 

Depending on your business model, calculating the ARR may or may not be worthwhile for your company. If your company is based on subscriptions and you define your company's growth in this way, the ARR is one of the most important key figures for you. If no annual contracts or similar are offered, the calculation is very likely superfluous.

 

Calculation of annual recurring revenue (ARR)

If you want to determine the ARR of your company, you can use a very simple formula for the calculation:

 

• ARR = number of buyers x annual subscription costs

 

This calculation is very simple and quite quick. However, a few factors are missing. This Annual Recurring Revenue (ARR) does not take into account additional sales or terminations.

 

Therefore, for a meaningful ARR , it is recommended to add the revenue from your annual subscriptions with other recurring revenue. Subtract losses due to cancellations from this. This will give you an ARR that provides a solid basis for further steps .

 

Alternative calculation of annual recurring revenue

There is another way to calculate the ARR of your business. To do this, you need the monthly average contract value (MRR) and multiply it by 12. In turn, you get the MRR by multiplying the recurring revenue by the number of your customers .

 

An example: Your company has 2,000 customers who each generate a turnover of 150 euros.

 

• 2.000 x 150 = 300.000

 

The MRR is therefore 300,000 euros. To determine the ARR, multiply the result by 12:

 

• 300.000 x 12 = 3.600.000

 

According to this calculation, the ARR of your company is EUR 3,600,000.

 

ARR and MRR - important key figures for Software-as-a-Service (SaaS) companies

In general, the Annual Recurring Revenue (ARR) provides a good overview of how well or badly a company is doing. You can use it to monitor how revenue is developing as your company grows. On this basis, plans can be made regarding the use of revenue.

 

In addition to ARR (Annual Recurring Revenue), MRR (Monthly Recurring Revenue) also plays a major role for SaaS companies. This refers to monthly recurring revenue. You can use the MRR as a kind of forecast, as this key figure tells you exactly how much revenue you can expect per month from customers with a subscription.

 

Like the ARR, the Monthly Recurring Revenue (MRR) fluctuates constantly. After all, new customers are always signing up and others are leaving the company. However, this is what makes the MRR so meaningful. You can see it as a kind of indicator of the economic health of your company.

 

If there is an above-average number of contract terminations over a period of time, it is important to check why this is the case. Your product may need to be revised or there may be other factors that are causing customers to cancel more often. Reasons such as the user experience may be responsible.

 

If ARR or MRR are falling, it may be advisable to look into customer acquisition methods.

 

ARR or MRR - which is better?

Both Annual Recurring Revenue and Monthly Recurring Revenue have their clear advantages. But which is better for your business? This actually varies depending on the type of subscriptions you offer:

 

• ARR is better suited to the mapping of multi-year contracts.
• MRR is more suitable for monitoring monthly subscriptions

 

 

4 reasons for the ARR

Why is it so helpful for a SaaS business to determine the ARR? There are actually several reasons for this:

 

1. Meaningful forecasts: You can use the ARR to make a forecast about the growth of your company. Of course, no forecast is 100% certain. However, taking various factors into account, the ARR is very meaningful
2. Better planning: The growth potential of your company can be better planned by calculating the Annual Recurring Revenue.
3. Improved goal setting: The ARR provides the perfect basis for setting SMART goals. This allows you to increase the success of your projects.
4. Arguments for investors: Are you looking for an investor? Then the ARR can be a powerful argument for potential investors.