For those seeking to make better use of available — often scarce — resources in more efficient actions, it is essential to pay attention to some indicators.
Whether to increase sales or strengthen communication actions, metrics — such as ARR (Annual Recurring Revenue) — will help you understand the future scenario of your organization.
And it is that ARR is used to estimate your company’s future revenue based on the number of subscriptions earned.
After all, planning is essential to be able to organize yourself internally and define, for example, which areas need more resources or what needs to be improved so as not to harm the financial health of your business.
Therefore, we will cover the following topics below:
You want to know more? Read on to clear all your doubts!
What is ARR?
The free translation of ARR into Spanish is something close to “annual recurring income“.
And, in practice, it is the indicator that will allow a better understanding of the expected income for a period. Namely, allows knowing how much income will be generated according to the number of clients in the base.
To further explain, a practical example makes that concept easier to understand, and Netflix serves as a good example of how this metric works.
In this case, the ARR is calculated based on the number of subscribers, both:
- Upsell, that is, those users who subscribed to a more expensive plan;
- Downgrades, who have reduced the price of their monthly rates;
- And of course the dreaded churn rate.
By adding revenue and loss — in the case of churn — Netflix can calculate your ARR; that is, you will know how much you should invoice during a year through your subscribers.
Thus, this forecast serves to understand if your strategies are, in fact, moving in the direction that your organization expects.
If your ARR is dropping significantly over a period of time, for example, that can be a strong indicator that your customer engagement and retention efforts aren’t being as efficient.
On the other hand, this KPI can be very useful to get investors or partners, gaining more confidence in the market with positive numbers.
It is also important to understand that the ARR is a long-term view, however that same calculation can be done on smaller ratios. How?
Well, through the MRR (Monthly Recurring Revenue) or, in Spanish, Monthly Recurring Income; with it it is possible to identify the same forecast for a shorter period, which can be useful if you need short-term actions.
Why calculate that metric?
Now, why should you closely monitor your company’s ARR?
Next you will know some of the advantages of being attentive to that KPI. Let’s see!
Help predict future income
We still do not have the ability to predict the future, however, it is possible to predict with greater precision the income that your company will have.
And it is that the ARR guarantees that greater control over the resources that are going to enter and, with this, the internal organization will be facilitated so that, for example, the growth of your business can be done in a more efficient and precise way.
Allows you to define goals
With ARR, you can also define goals for your business, i.e. what needs to be improved internally to achieve even better results.
You can, for example, establish numbers that will be achieved for profits or sales by your team, managing to identify the main needs for the long-term success of your organization.
Earn market trust
The ARR is also a way to gain the trust of the market you are located in, either to close new partnerships or to get more investors.
In the end, by having promising numbers for the year, it is easier to convince investors and clients to trust in the potential of your company, right?
How to calculate ARR?
The good news is that calculating the ARR is not complicated to do, and so you don’t waste time and start tracking this KPI, we explain the formula below:
Total resources generated with annual subscriptions + Total resources generated with new clients and upsells – Total resources lost with downgrades – Total resources with lost clients = ARR
It’s not that complicated, right? Even the calculation of ARR can also be done by multiplying the numbers generated in the MRR.
In practice, the calculation to be carried out is the same, only reducing the period to one month and not to the full year. Then, simply multiply the number obtained by 12 and you will also have access to your annual recurring income.
Therefore, If you want healthy growth for your company and the ideal financial conditions to withstand constant competition in the market, monitoring this metric is essential..
From the calculation of the ARR, you can more accurately identify which are the best directions for your future investments.
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