What is MRR growth
Annual Recurring Revenue (ARR)
At the Annual Recurring Revenue (ARR) it concerns the determination of the shares in the total turnover, which regularly return and accordingly for strategic planning predictable are. The dimension of the ARR is usually € million per year.
The key figure is in particular in Software / SaaS environment one of the most important KPIs, as the goodwill is often calculated as a multiplier of the ARR.
Annual Recurring Revenue is the sum of Monthly Recurring Revenue (MRR) for an entire year that customers pay on a recurring basis.
So the ARR is about determining that part of a company's annual turnover that is made repeatedly and at regular intervals. Such sales are for example through Subscriptions or generate regular maintenance costs for services. That's why they play, for example, in the SaaS industry a particularly large role where business models are structurally similar to a subscription.
For most companies, it is important to determine the proportions of the following components in the Annual Recurring Revenue: the proportion of
- new contracts,
- extended contracts and renewed deals,
- Upgrades compared to the half-year or the time of the contract renewal,
- Downgrade or changes with a loss compared to the first half of the year or when the contract is extended,
- terminated contracts.
In contrast, one-time expenses, consumption and usage fees are not included in the ARR.
Calculating the ARR is pretty simple: (total subscription cost per year + recurring income from add-ons or upgrades) - lost income from cancellations.
If your company's pricing strategy is based on monthly recurring revenue (MRR), you can also calculate Annual Recurring Revenue by simply multiplying the MRR by 12.
Aim of the Annual Recurring Revenue
The goal of determining the ARR is primarily that Predictability with the results for the strategic direction the company. The relevance of these numbers varies strongly depending on the industry and business model. In principle, the influence of the ARR increases with its share in total sales.
Both ARR and MRR provide valuable insights into how well or badly a company is doing. This data can therefore be used to forecast how sales will develop as the company grows. Based on this data, the company can then plan what it can do with this turnover.
With the Annual Recurring Revenue, companies can also see the development from year to year at a high level, which is useful for long-term product planning and the creation of business plans.
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