What is Annual Run Rate Revenue (ARRR)?
Annual Run Rate Revenue (ARRR) is a financial metric that projects a company’s annualized revenue based on its current revenue performance. It is typically calculated by annualizing the Monthly Recurring Revenue (MRR) – for instance, multiplying the current MRR by 12.
How do you calculate MRR?
Monthly Recurring Revenue (MRR) is calculated by summing the recurring revenue generated from all active subscriptions within a month. Here’s how you can calculate it:
Basic Formula
- Identify Recurring Revenue Sources: Gather data on all subscription plans.
- Calculate MRR for Each Plan:
- For each subscription, multiply the number of active customers by the monthly price of the subscription.
MRR Calculation Example:
- Subscription Plan A: 100 customers at $10/month
- MRR = 100 customers × 10=10=1,000
- MRR = 100 customers × 10=10=1,000
- Subscription Plan B: 50 customers at $20/month
- MRR = 50 customers × 20=20=1,000
Total MRR:
- Total MRR = MRR of Plan A + MRR of Plan B = 1,000+1,000+1,000 = $2,000
Important Notes:
- Exclusions: Only include revenues from subscriptions; do not include one-time fees, setup fees, or non-recurring revenues.
- Adjustments: Adjust for upgrades, downgrades, and cancellations during the month to get an accurate MRR.
What is the difference between ARR and MRR?
The primary differences between Annual Recurring Revenue (ARR) and Monthly Recurring Revenue (MRR) lie in their time frames and how they’re used to assess a company’s performance:
- Time Frame:
- ARR: Measures revenue on an annual basis. It provides a long-term view of a company’s revenue stream.
- MRR: Measures revenue on a monthly basis. It offers a short-term view, allowing for more frequent tracking of revenue fluctuations.
- ARR: Measures revenue on an annual basis. It provides a long-term view of a company’s revenue stream.
- Calculation:
- ARR: Calculated by taking the MRR and multiplying it by 12. It may also include other fixed, recurring revenues.
- MRR: Calculated by summing all recurring revenues generated in a given month.
- ARR: Calculated by taking the MRR and multiplying it by 12. It may also include other fixed, recurring revenues.
- Use Cases:
- ARR: Often used by investors and stakeholders to assess a company’s growth potential and sustainability over a longer period. It’s particularly useful for subscription-based businesses.
- MRR: Helpful for operational decisions and monthly performance tracking, allowing businesses to quickly identify trends or changes in revenue.
- ARR: Often used by investors and stakeholders to assess a company’s growth potential and sustainability over a longer period. It’s particularly useful for subscription-based businesses.
- Insights:
- ARR: Provides insight into long-term revenue stability and future cash flow.
- MRR: Useful for assessing short-term performance, such as month-over-month growth or losses.
Why is ARR important for a business?
Annual Run Rate Revenue (ARR) is important for a business for several reasons:
- Revenue Forecasting: ARR helps businesses project future revenues based on current performance, which is crucial for budgeting and financial planning.
- Investor Confidence: A strong ARR can attract investors by demonstrating steady income and growth potential, signaling the health of a subscription-based business.
- Performance Benchmarking: Companies can use ARR to evaluate their growth over time, compare performance against industry peers, and set realistic goals.
- Cash Flow Management: Understanding ARR aids in better cash flow forecasting, allowing businesses to make informed decisions about expenses and investments.
- Sales Strategy Development: Businesses can tailor their sales and marketing strategies based on ARR trends, focusing on customer retention and acquisition to enhance recurring revenue.
- Valuation: For SaaS and subscription-based companies, ARR is a critical metric used in valuation, influencing merger and acquisition discussions and sales.
- Resource Allocation: Understanding the ARR helps in efficient allocation of resources and planning for scaling operations or entering new markets.
Useful Resources
- API Documentation: Always refer to the official API documentation for integration guidelines.
- Developer Communities: Engage in forums or developer communities for support and sharing best practices.