ARR Definition: What is ARR?

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ARR is an acronym for Annual Recurring Revenue. ARR is a term you’ll often see in press releases or trending news stories for SaaS companies or subscription services. It’s important to understand what ARR really is and what it means, but you also need to know that ARR is sometimes incorrectly used to describe the size of a startup’s business. That’s really ok, though. It happens. What you need to do is make sure you know what the terms stand for, what they really refer to, and why one method of recurring revenue calculation might be more desirable than another for subscription-based companies.

What is ARR?

ARR is a metric that allows you to measure the contractual value of a subscriptions over a year. The ARR is the value that you can reliably expect to repeat, long-term. So, it’s a high-level overview of your company’s health, which is frequently used to calculate recurring revenue for Business-to-Business subscription services. With ARR, you are looking at just revenue from subscriptions that is contractually obligated for a year or more, but it is still based on your relationship with your customers. It’s not a fly-by-night, one-time transaction or even a 30-day deal. The ARR indicates overall momentum, which is also why your investors will probably prefer the ARR calculation. One-time sales are great and all in their own way, but if you can accurately predict recurring revenue over a long period of time, it’s just more attractive from an investment point of view.

How Does MRR compare?

MRR refers to Monthly Recurring Revenue. It’s another popular method that subscriptions services use for normalizing the recurring revenue. It’s a bit more limiting, because you’re only looking at a month-long view. MRR is a snapshot view, and since there are so many variables involved in forecasting for subscription services, it can be easier to pull numbers for 30-day time-frames than to project out your contract-based recurring revenues for a year. That’s also why MRR is typically used for Business-to-Customer (B2C) subscription models, compared to Business-to-Business (B2B). It’s not an either/or proposition. You can use both MRR and ARR as metrics for calculating your company’s recurring revenue.

Why Use ARR?

The ARR gives you data on the health of your company. It’s a powerful tool that can help you can use to gauge the current state of your subscription service, but it also gives you forecasting insight. Because your MRR income can differ month-to-month, calculating your ARR is a better metric to look at. You’re removing the outliers, the one-time fees, seasonal upheavals, or other unusual blips in your revenue calculations. Normalizing your recurring revenue in that way also allows you and all the other stakeholders to understand true growth and loss projections. The ARR also aligns with your Generally Accepted Accounting Principles (GAAP) revenue more closely, which may give you a better generalized perception of the health of your company.

So, it goes beyond just finding out your company’s efficiency levels, but it allows you to improve your numbers. The ARR can give you long-term projections on the subscription products and sales talent that are performing the best. You can then build upon that data to find ways to reward your team for successes, and then work to facilitate the cross-sell of your other products and services. By really digging into what’s working and where your pain points have been and will be, you can build an increasing revenue model for each subscription account via upgrades and additional services. It’s also a great place from which to build deeper relationships with both your talent base (your staff) and your business customers. The question really is… Are you noticing what’s going on with your SaaS company? Are you analyzing the data, listening to what your staff and customers are saying, and delivering upon what both your internal and external customers want and need from you?

What Could Go Wrong?

While your ARR can be a good thing for projecting recurring revenue over 12-months, you must also take into account other factors that could be slanting your numbers, and making them appear rosier than they should. Even if you’re calculating your ARR correctly based on the contracted value, add-ons and upgrades/downgrades can skew your calculations. But there can also be the danger that you’ll rest on your laurels. Looking at your subscription service over a year’s time can lead you to believe that it’s guaranteed income. Just because your business customers are happy now, it doesn’t mean that you don’t have to continually remind them of your value, and make it worth that annual-contract subscriptions rate of service.

Increase Your ARR with Referrals

Your calculation of ARR gives you a metric for determining the current state of your SaaS company, but it’s also a benchmarking tool you can use to plan for and achieve continued growth. The easiest and most cost-effective way to increase your ARR is with referral generation. Statistically, 83% of your satisfied customers would refer other customers to you and your services, but only 29% actually follow through. There may be a number of reasons why you haven’t asked your customers to refer their colleagues to you, but your reasons really just don’t hold up. Particularly when you’re looking at ARR calculations, those businesses have signed up to use your subscription services for at least 12-months, maybe longer. You’ve built a relationship, and a sense of trust. They have decided that your services are worth the cost, that you offer something of value, and statistically, those customers are ready to refer others to use your subscriptions services. But, there’s one factor that is often overlooked in the referral generation process. You, have to ask them to tell others about your services. If you never ask your most loyal business customers for a referral, you really have no idea what the results could be. Just a few referrals from each business customer could also make a dramatic difference in your overall ARR.

Tap into your company’s most important asset: referrals. Try today.