ARR is the amount of revenue that a business expects to generate every year on a recurring basis. Recurring revenue is probably the most salient feature of the subscription model. Annual Recurring Revenue gives you an overview of the performance of the business on a year over year basis.
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Importance of ARR
ARR is a key metric to understand two aspects of a subscription company or SaaS business’s revenue:
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Erlöse aus Neuverkäufen und Upgrades (Erweiterungserlöse)
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Umsatzverlust durch Kunden Abwanderung und Downgrades
Bei korrekter Messung ist ARR ein guter Indikator für die Gesundheit Ihres Unternehmens und die Prognose zukünftiger Einnahmen.
ARR also adds essential context for other metrics. For example, say you have a churn rate of 4%. Is that reason to worry? Or is it acceptable? But when you look at the churn in a bigger picture with the ARR factored in, you know if it is reason enough to worry.
Investors love the predictable revenue that the Abonnement-Geschäftsmodell allows. So growing SaaS companies with a healthy stream of ARR stand a better chance at attracting more investors and keeping the board members satisfied.
How Do You Calculate Annual Recurring Revenue?
It is fairly simple to calculate ARR. Here’s the formula and everything you need to know about it. You can calculate ARR as follows:
ARR = Summe (jährlich wiederkehrende Gebühr aller zahlenden Kunden)
If you bill your customers monthly, you can calculate ARR as:
ARR = (Vertragswert) x (12/ Vertragsdauer in Monaten)
For example, if a customer signs a 3-year contract (36 months) for $60,000, which is billed monthly, your ARR calculation is:
ARR= $60,000 x (12/36) = $20,000.
If you bill your customers annually, you can calculate ARR as:
ARR = (Contract Value) / (Duration of contract in years)
For example, if a customer signs an annual contract for two years at $40,000, your ARR calculation is:
ARR= $40,000/2 = $20,000.
While this seems relatively straightforward, it is important to know whether all the charges included in the contract value are ‘recurring’.
Elements to be Included in ARR Calculation
Since ARR is a calculation of all recurring subscription charges in a given period, you need to include the following elements in the ARR calculation:
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Wiederkehrende Rechnungen: It covers all recurring Abonnementeinnahmen, including recurring fees such as recurring subscription charges per user or seat.
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Upgrade revenue: When a customer moves from a lower value plan to a higher value plan, mostly due to an upsell, it increases the customer’s recurring revenue. Hence you also need to include Upgrade-Einnahmen in your ARR calculation.
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Downgrade revenue: In a scenario when a customer moves to a lower value plan from a higher value plan, it results in MRR-Abwanderung. It is essential to include it in ARR calculations as it reduces the recurring revenue from that customer.
Elements to be Excluded in ARR Calculation
ARR is a forward-looking metric and tells you how much revenue you can expect. Naturally, you don’t have to include elements of non-recurring nature in the ARR calculation. These elements are:
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Einmalige Gebühren
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Einrichtungsgebühren
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Non-recurring add-ons
The Difference between ARR and MRR
Monatliche wiederkehrende Einnahmen (MRR) is the predictable recurring revenue earned from subscriptions in a particular month. There are several different types of MRR, such as neue MRR, upgrade MRR, Erweiterung MRR und Kontraktions-MRR. This level of detail and segregation gives useful insights on a monthly basis. For businesses that offer yearly subscription contracts, tracking ARR makes more sense.
That being said, it is never an either/or situation when it comes to ARR and MRR, as the former gives a long-term picture while the latter offers short-term insights.
Common Pitfalls to Avoid in Interpreting ARR
1. Mistaking ARR for Cash
ARR is not the same as cash. Let’s understand with the same example as we did above. A customer signs an annual contract for two years at $40,000.
In this scenario, the ARR is $20,000.
But, assuming an upfront payment, cash is $40,000.
Mistaking ARR for cash can create a falsified image of how much money a business has.
2. Looking Backward, Not Forward
Another common mistake is when businesses calculate ARR by adding up the total revenue for the last 12 months. But in reality, ARR is a forward-looking metric, and it takes into account how much revenue you can expect in the future, not how much you generated last year.
3. Not Accounting for Discounts
If you have given your customers discounts or coupons, that means they are not paying the full price of the subscription. It is essential to account for the discounts when calculating ARR. For example, if the annual subscription value is $10,000 with a 20% discount, the customer is only paying $8000, and only that should be considered for ARR calculation.
4. Not Including Late Payments
Every business has delinquent customers. You can keep late payments under check by implementing a Mahnwesen mechanism, but when the late dollar amounts come rolling in, remember to include them in your ARR calculations.
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- Quelle: https://www.chargebee.com/resources/glossaries/annual-recurring-revenue/
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