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What is ARR and how to calculate it?
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The ARR or recurring annual revenue is a metric derived from the MRR. Like this one, its measurement is very important in all companies with a strong recurring or subscription component.
What is ARR?
In essence, the ARR is the amount of turnover from this year and the amount that you hope to repeat the following year.
No more no less.
This measure obviously does not include one-off, exceptional revenues. Only recurring income.
How is the ARR calculated?
There are several different ways to calculate the ARR, depending mainly on the complexity of your business model.
The most rudimentary and inaccurate formula is:
If you have already calculated your MRR and want to have a vague idea of your ARR, without thinking of further uses of this metric, you can use this formula.
If you want to further refine your calculation, you should prefer this formula:
- New ARR: total annual recurring turnover.
- Extension of ARR: extension of recurring annual revenue on existing accounts.
- ARR lost: loss of recurring income due to the decline or deterioration of certain existing accounts
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What is the ARR for?
The ARR metric is used for 2 main tasks:
- Evaluate the evolution of the company's recurring revenues.
- Project future income.
Assess the evolution of the company's recurring revenues
With ARR, you can validate your business decisions and borrowed business strategies throughout the year. Were they generally good and did they lead you in the right direction (i.e., increase the ARR)? On the contrary, why didn’t they work as you expected?
Project future income
With the ARR you can very finely estimate the revenue expected for the following year. How? Starting from this figure then applying a weighting representing the expected churn rate and another weighting representing the expected growth.
These forecasts will allow you to better plan cash, marketing, and all the activities that depend on your income and your workforce.
If you are familiar with the MRR, you notice that these two formulas are very similar and you therefore wonder…
What are the differences between ARR and MRR?
In essence, the two measures draw the same reality. The main difference is based on the time interval. One month apart, one year apart.
From this perspective, the main difference is that one has a macro approach (ARR) and the other a micro approach (MRR).
Thus, ARR will help you more in making decisions related to business planning and forecasting future growth.
The MRR, meanwhile, allows you to see more in detail. It is useful for analyzing the daily development of the company and validating the decisions or the commercial strategies implemented at that time.
In short
The ARR is a measure very similar to the MRR which serves the same objectives (to make projections and enhance the development of the business) with a more general perspective.
In order to properly track ARR, you need to manage and organize your data centrally, and one of the best ways to do this is by using a CRM.
So why wouldn’t try efficy CRM?
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