What Is ARR?

Does your business offer annual subscriptions for certain things? Maybe you offer annual subscriptions for access to a physical location, or you have subscriptions for online services. Some of these deals can include annual subscriptions that offer lower per-month prices than if someone paid for a monthly subscription.

You can calculate how much money you’re making off these annual deals by looking at your Annual Recurring Revenue or ARR. Your ARR helps you see how much you collect from annual subscriptions. It displays how you’re getting regular money into your business, giving you an idea of what to expect for your future budget and spending needs.

The ARR is similar to the monthly recurring revenue or MRR you may earn. The ARR is an annualized form of the MRR. It gives you a thorough idea of what you are earning from your customers every year. You can use this value to identify the possible income you’re earning and what you can expect out of your work.

Your ARR is useful when you’re trying to promote your business and highlight something of value to your customers. You can use your ARR to illustrate what is happening in your business and how it is growing or shrinking. It provides a realistic display of your business’ health, plus it helps you establish sensible goals for the operation. You can plan your business surrounding whatever interests you the most through your ARR.

How Can You Calculate Your ARR?

You can calculate your ARR with a few points:

  1. Review the types of annual subscriptions you offer. You may have different subscription tiers that cost varying amounts each year.
  2. Look at any discounted tiers you offer. These include tiers for people who paid for something in advance and qualify for a special discount.
  3. Calculate the total amount of subscribers you have for each tier you offer to people.
  4. Multiply the number of subscribers in each tier by the value for each subscription.
  5. Add all the tiers together to see what works.

For example, you may have 1,500 subscribers who spend $100 a year on something, plus you have 600 subscribers who spend $150 for a higher-value subscription plan. You can multiply these two separate tiers to get 150,000 for the $100 plan and 90,000 for the $150 plan. You’re getting $240,000 in total ARR through these two tiers.

Different From Traditional Revenue

Your ARR is different from the regular revenue you earn through your operations. Traditional revenue comes from various traditional activities, including product sales, interest rates, and other forms of income. Your ARR comes from payments that people complete each year.

Your ARR helps you predict whatever you’re going to earn after a while. You can use your ARR to guide your business forecasts surrounding what you want to plan and how you’ll sell things of value.

Expansion vs. Churn

Another part of your ARR to review involves the expansion and churn you experience each year. The expansion entails the new subscriptions you bring in and any people who upgrade to a more expensive tier. The churn entails people who either cancel their subscriptions or downgrade to a lower-value tier.

You can calculate your ARR based on how much money you’re bringing in through expansions versus what you are churning out. The analysis helps you plan your revenue flow well and see if your revenue is growing or shrinking.

Excluding the Right Things

While your ARR can include many details over how you’re operating your business, you must also watch how you calculate your data. Avoid adding these features in your ARR report:

  • Do not include setup fees for whatever subscriptions you plan. You can create a separate column that lists how much you earn in setting up subscriptions. These charges traditionally happen once at the start of a plan.
  • Avoid adding discounts to your measure. Discounts are temporary and can work at many times of your choosing. You can create separate tiers dedicated to whatever discounts people receive when calculating your revenue.
  • Look at one-off upgrades people make to their accounts. Sometimes these upgrades can be calculated as part of your expansion efforts, but they only happen once.

Planning your ARR measurements well is essential to your success. You can use your review process to see how well you’re running your business and that you know what fits when running your efforts.

Should You Calculate Annual or Monthly Revenue?

Your ARR is essential to helping you review your business operations. But you could also monitor your monthly recurring revenue or MRR if you want a more immediate review of what’s happening with your business.

You can calculate both of these revenue measures when seeing how your business operates. You can calculate your ARR to get a long-term idea of how much income is entering your business. You can plan your company’s activities for the year and produce new road maps surrounding what you expect to find in your workplace.

You could also calculate the MRR to review unique changes in your business as the year progresses. You might notice changes based on the season, any promotions you offer, or changes to your local economy. Your MRR analysis can work alongside your long-term ARR reports to help you guide your work, giving you a better chance at more future revenue.

Your revenue totals will vary throughout the year. Your MRR helps you see what shifts are coming based on whatever you’re managing in a year. The details help you see what’s working and if you need to make any possible changes.

Check Your ARR Today

Your annual recurring revenue or ARR can help you figure out what you should do when spending money. Look at how your ARR is moving forward and see what you should do when changing your business plans for whatever future efforts you hold. Your analysis gives you more control over how you’re managing your work and what you can expect from your money.

Save Time, Money, & Resources

Categories

FinTech

Contact HMS

Ready for the ultimate credit card processing experience? Ask us your questions here.