What is annual recurring revenue (ARR) and why is it important?
When applied correctly, metrics are a powerful tool for SaaS companies.
Metrics don’t only tell you where your business and app(s) stand today — they should also inform your forecasting, road mapping, and future growth strategies so that you’re more successful every year.
There are hundreds of SaaS metrics you can leverage to understand your data and shape different elements of your business.
But if we had to choose just one metric to give you some of the best, high-level insight into mobile app performance and planning — we’d choose annual recurring revenue (ARR).
So in this article, we’re going to explore all the facets of annual recurring revenue, including
A refresher on the ins and outs of ARR
How to find ARR
Why ARR is an essential metric for SaaS businesses with apps
Strategies for growing ARR
What is ARR?
Annual recurring revenue is used by SaaS companies to measure the average amount of revenue generated from year-long subscriptions, term contracts, and any other long-term recurring payments.
ARR is a key metric for businesses with recurring revenue models because it doesn’t just measure year-over-year growth but also helps with planning what profits may look like a year out.
You may see ARR measured with monthly recurring revenue (MRR). MRR measures the average value of recurring payments on a monthly basis.
Where ARR is a powerful long-term planning and valuation tool, MRR can be considered a more short-term operating metric that indicates active business health as it tracks month-over-month growth and changes.
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How to calculate ARR
Predictable revenue is the lifeblood of a SaaS company, which is why getting ARR wrong can be detrimental.
Miscalculations can lead you, as well as your investors, to misunderstand the health and potential of your subscription revenue, which can cause you to be either overfunded (and equity poor) or under-resourced (and unable to expand) for the year ahead.
The formula for calculating ARR can and should be adjusted to fit your business.
Typically, it looks something like this:
ARR = (yearly recurring revenue for the year + recurring revenue from add-ons and upgrades for the year) - revenue lost from cancellations and downgrades during the year
What’s very important is that you try to only calculate recurring and lost revenue that spans a year. Most one-time fees, adjustments, and add-ons shouldn’t be included if you want to keep your ARR calculation highly accurate and indicative of your company’s direction.
And, just as critical, you must be consistent with your ARR formula from year to year.
Who should measure ARR
Of course, ARR is best for businesses using a subscription model or other recurring revenue model where the minimum subscription or contract term is a year.
Usually, subscription businesses with these long-term agreements experience lower transaction volume and higher transaction value. If that sounds like you, ARR may be your most reliable growth metric as MRR won’t show the entire picture.
In addition, the ARR metric will nearly always come up in board and investor meetings. So even if your company uses MRR and other metrics day-to-day, if you as a decision-maker, find yourself in these conversations often, you should also have your finger on the ARR pulse.
While ARR sometimes gets dismissed as a vanity metric, pivotal information can be gained from ARR — when you know where to look.
The future of revenue
Probably the most well-known use case for ARR is forecasting future revenue.
ARR reasonably predicts revenue for the year, which is something shareholders need to know, as well as folks planning for technology purchases, team growth, and feature roadmaps in the near future.
Overall growth and success
As we’ve already touched on, ARR is a reliable, trusted, and widely-used resource for measuring overall company growth.
Tracking ARR over the years provides insight into whether your company is hitting growth targets — and whether business decisions and the people who make them have been successful.
Business model performance
Total revenue takes into account all the many ways your company generates cash flow. But ARR is unique in that it only measures recurring revenue from app subscriptions/contracts. That makes ARR an interesting indicator of whether the recurring business model is working for you — or not.
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How does ARR break down for you?
Is recurring revenue the result of multi-year contracts? Or automatically renewing yearly subscriptions? Maybe an unexpected chunk is actually from upgrades?
And how do your losses look? Lots of outright cancellations? Or is it more like downgrades as users try to cut costs in an uncertain economy?
ARR will help you understand these nuances and focus your go-to-market (GTM) teams on acquisitions, upsells, or whatever actions have the most impact.
3 strategies for improving ARR
Companies typically have two available options to increase revenue: bring more money in or allow less money to leave.
Here are a few strategies to tackle both options and grow ARR.
1. Build more recurring revenue opportunities
The more qualified traffic you can drive to your app, the more annual subscriptions, and, therefore, annual revenue you should be able to land.
That means turning up the marketing tactics to attract qualified leads and sharpening up sales to make sure they’re ready to close deals with all these new leads.
This, in turn, means you might start to see some creep in customer acquisition costs.
So let’s tackle that next.
2. Cut acquisition costs
Customer acquisition cost takes the total spend on acquisition over a period divided by how many paying customers were netted during that period.
What you’re willing to pay for acquisitions will come down to your customer's lifetime value.
While the acquisition cost threshold will be different for every business and may fluctuate within the same business, here are several tactics to help keep it manageable:
Get your ideal customer profile (ICP) dialed in so that your GTM motion and messaging have the potential to land and convert.
If influencer/affiliate marketing makes sense for your app, spin up a program where partners get paid a percentage-based commission once their traffic converts.
Focus on renewals, referrals, and expansion revenue within your existing customer base instead of only sourcing new customers.
Introduce longer-play tactics, like using content marketing to grow brand awareness, that you only have to pay for once, then let the impact compound over time.
And of course, lean on customer retention. Since repeat customers spend more and are easier to sell to than a new audience, we’ll focus solely on this cost-reduction strategy in our next and final section.
3. Increase retention by improving the app experience with Sendbird
Interestingly, consumers are growing more loyal.
Marigold’s 2023 Consumer Trends Index found that nearly 60% of consumers will pay more to purchase from a brand they like. That’s an increase even from 2022.
What breeds this retention? Great products or services, a friendly website and/or mobile app experience, and remarkable customer service.
How can your mobile app deliver on these customer desires while simultaneously trying to cut costs and grow ARR?
By launching conversational capabilities in your app via Sendbird’s engagement platform.
With Sendbird’s easy-to-use suite of SDKs, APIs, and UI kits, businesses of all sizes will finally be able to:
Spin up integrated live chat support experiences
Add a sales concierge platform for serving rich in-app shopping transactions
Deliver personalized in-app marketing messaging your users will actually want to read
Create an operations inbox so your app users never miss an important announcement or notification
Upgrade the in-app experience and retain your loyal following by partnering with Sendbird to build better customer experiences, support, and relationships.
Sign up to try Sendbird for free or create a free developer plan to see how our premium functionality will work for you.