You Create Right Formula To Calculate Your Annual Recurring Revenue

Continues flow of recurring revenue is essential for the sustainability of subscription businesses. Today, businesses opting for subscription business models are earning from month-to-month subscriptions.

Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR) are the key performance indicators that no subscription business can ignore. The performance of MRR and ARR is the best indicator to know the performance of your recurring billing business.

Though ARR is an important KPI, not all businesses calculate it rightly. A mistake in calculating ARR can significantly affect your predictive analysis in the subscription business.

In this article, team SubscriptionFlow will help you create the formula to calculate ARR for your subscription business the way you should.

Also Read: You Need A Recurring Revenue Stream to Draw Success in 2021 And Onwards

Various Dimensions of ARR That Helps in Creating ARR Calculation Formula

The factors that affect annual recurring revenue and its dimensions are far diverse than just the money that recurring customer brings. Cover the dimensions of ARR with SubscriptionFlow, and grow your recurring revenue on a monthly and yearly basis.

Performance of the Business

If you hit the revenue targets, then it helps in improving the image of your business. In the subscription business market, you will find your competitors even the entrepreneurs investing a lot in branding. Companies adopt the best subscription management software and push marketing teams to spend time and resources to improve the perception of a business in the market. However, improvement in ARR is a huge factor that plays role in the branding of a business.

When brand awareness increases, the investors get attracted to the subscription business. It is easy to understand, investors are always interested in investing the money in a business that is on the right path to success.

One of the challenges to bring investors to a company is the lack of education about your business. ARR improves the brand image. And your brand image is the way to propagate the performance of your business to the investor. Calculate ARR rightly if you are looking for investors because when it comes to finding investment for your business, the revenue that you earn is the primary factor that investors consider.

Also Read: Leverage Subscription Management Software-Expand MRR for Your SaaS Business Growth in 2021

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Revenue Predictions

No one can think of improving the revenue without having revenue targets. And how to set these revenue targets? Following are some of the factors that play a key role in setting the effective revenue targets:

Competitive analysis of the market
Performance of your subscription business
Investment in your subscription business
KPI performance (and of these KPIs in ARR)

When you are setting the revenue targets for the future, it is important to consider the performance of the business and the revenue that you earned previously. Business analytics is the backbone of the subscription business economy. You have to explore customer data and get useful business insights to predict the revenue in the future and set effective targets to achieve.

If you are already hitting the revenue targets, still you need to track ARR and MRR to further improve your recurring revenue. If you do not track ARR after hitting the revenue targets, it is more like winning a jackpot and dumping it in the waste bin.

Also Read: Convert More, Manage Churn, and Grow Business—The SubscriptionFlow’s Guide to SaaS Revenue Forecasting

Important Metrics to Monitor

Another very important factor that cannot be ignored when covering the dimensions of ARR to create the formula for ARR calculation is the metrics. Following are the metrics that should be monitored if you want to calculate annual recurring revenue rightly:

Customer acquisition cost
Customer retention rate
Customer churn
Conversion rate
Monthly recurring revenue

It is better to monitor these KPIs per month because the monthly performance of metrics shows that what you are going to earn at the end of the year and what ought to be your revenue targets.

Also Read: Three Core Metrics to Measure Subscription Business Growth

The ARR Calculator for Your Subscription Business

By now, you are aware of the facets of ARR that are beyond collecting money from diverse revenue streams. It is time to take you towards creating the formula to calculate ARR for your business.

First, you should know that the way you calculate MRR can be multiplied by 12 to find ARR. To put it simply:

ARR = MRR × 12

How to Calculate MRR?

Here is the equation

The revenue of existing customers can be calculated either with the customer-to-customer method or with the average revenue per user method.

From this formula, you can deduce the following figures that you must have to calculate monthly recurring revenue so that you can multiply MRR by 12 to finally calculate ARR:

Revenue that you are earning from the existing customers
Revenue that you earn by cross-selling and upselling is the amount of revenue that you earn by selling complementary items and add-ons respectively.
Revenue that the company earns by re-engaging the dormant subscribers.
Money that the business loses because of the cancellation of subscriptions. You can calculate this amount with the help of the customer churn rate.
Resources that you need to acquire more customers.

Concluding the Vitality of ARR for Subscription Businesses

There is not just one reason for which you need to work on your ARR. However, finding investors is very challenging for the subscription business, and an increase in ARR is very helpful in getting the attention of investors. When revenue increases, the chances of profitability from the investment in your business automatically increases that urge investors to invest their money in your enterprise.

Annual recurring revenue growth is the driving force behind investment, expansion, and acquiring more subscription business growth.

For your subscription business, you can onboard SubscriptionFlow—a platform that offers subscription management services. At this platform, you can manage subscriptions and get a fair chance to increase ARR because SubscriptionFlow experts also offer consultancy and training.