What is annual recurring revenue (ARR)?
Annual recurring revenue (ARR) measures the amount of revenue that a company can expect to generate from its customers every year for the life of a subscription/contract.
This metric is commonly used by subscription-based businesses to help them understand their revenue streams and predict their future earnings.
How to calculate annual recurring revenue (ARR)?
To calculate annual recurring revenue (ARR), divide the ‘total contract value’ of the subscription by the ‘years of the contract’. Another simpler way to calculate ARR is – by multiplying MRR (Monthly Recurring Revenue) by 12, i.e, MRR X 12.
Keep in mind that you should not include any one-time or non-recurring revenue.
Formula for calculating annual recurring revenue (ARR)
Real-life example of annual recurring revenue (ARR)
Let’s say you own a micro SaaS business. Your subscriber purchases a 5-year subscription for $10,000.
Then, your ARR will be: 10,000/5 = $2,000 each year.
What’s considered a good annual recurring revenue? (benchmark)
There is no ideal annual recurring revenue (ARR) that applies to all businesses. It can vary greatly depending on the industry, the size of the business, and other factors.
In general, you should strive to achieve a high ARR, as it indicates a stable and reliable stream of income.
The median ARR Growth Rate is 41% for companies with an ARR between $2.5 million and $10 million. It may be helpful to compare your business's ARR to that of similar businesses in the same industry to gauge whether it is good.
However, it is important to carefully manage your ARR and ensure that it is sustainable in the long term.
Ways to increase your annual recurring revenue (ARR)
- Increase customer lifetime value (CLV): This boils down to customer retention. Keeping your existing customers happy and engaged can help to reduce churn and increase recurring revenue over time. Find out about ways to increase customer lifetime value.
- Try out upselling and cross-selling: This involves offering existing customers additional products or services that complement their current purchase. Encourage customers to subscribe to a higher-pricing subscription plan that contains valuable upgrades, features, and add-ons. Read some upselling strategies to grow your business
- Re-consider your pricing: Carefully considering your pricing strategy and potentially increasing prices on your products or services can also help to increase revenue. But consider some elements before raising your prices so that you don’t lose your existing customer base.