Usually, SaaS businesses have a recurring revenue model. This model allows them to amplify their growth by continuous revenue inflow. As a result, ARR is crucial to analyse their recurring income each year.
Annual Recurring Revenue (ARR) is the continuous revenue that the company receives for one year. Thus, having a good ARR for SaaS business is a positive indication that it is thriving.
If you are a business owner, you should always understand ARR and measure it accurately. Hence, to know more about ARR for SaaS, read this article.
What is ARR?
Annual Recurring Revenue is the annualised form of Monthly Recurring Revenue (MRR). ARR helps assess the amount of revenue a SaaS firm generates in a year. ARR is a vital measurement to analyse the year-over-year revenue increase of subscription-based SaaS businesses.
How to calculate Annual Recurring Revenue?
ARR is calculated by multiplying MRR (Monthly Recurring Revenue) by 12 - the number of months in a year.
ARR = MRR x 12
For example, let us say that the MRR for a company is $1000.
So, ARR will be 1000 x 12 = $12000
Note: Some SaaS companies only include contracts that last more than a year for computing their ARR. It only makes sense for firms that sell the bulk of their products on fixed long-term contracts. Only a small percentage of SaaS companies adopt this type of method.
Why is ARR important?
What makes ARR essential is its ability to capture the essence of business growth. Below are a few more reasons for its importance -
- ARR provides a broad picture of business growth - While MRR can provide a quick overview of short-term growth, ARR paints a more comprehensive picture. ARR gives you a better idea about your business growth in the long run. You can utilise insights derived from ARR for long-term planning, corporate road mapping, and financial modelling.
- ARR helps you to analyse your product-market fit – ARR provides you with information about the newly acquired customers and the lost customers, i.e., those who cancelled their subscriptions. ARR is perfect to analyse whether you have product-market-fit or not. For example, if you roll out some new features in your product and your ARR decreases, then this may indicate that your current target market is not liking the changes you made to your product. Hence, ARR for SaaS businesses is a good indicator of their product-market fit.
- ARR is a good way to demonstrate your growth - As you expand your SaaS business, ARR will be an excellent metric to demonstrate your increased market share and revenue growth to investors and other stakeholders. Many big SaaS firms utilise ARR to assess their overall business health and performance.
Optimising your ARR for SaaS businesses
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