How to calculate ARR and MRR
One of the most important tasks that a SaaS company must do each year is to estimate and project future revenue. Tracking both your monthly and annual subscription revenue is one of the most effective ways to do this, as it is a strong reflection of customer growth. Let’s take a look at the correct way to do both.
Your calculations will largely depend upon the way that you have structured your subscription model. SaaS companies may offer either monthly or annual subscription plans and may have multiple levels of each from which customers can choose. These variables will make a big difference in how you calculate and use your metrics.
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Monthly Recurring Revenue and Annual Recurring Revenue
Every company can choose whether to use their Monthly Recurring Revenue (MRR) or their Annual Recurring Revenue (ARR) to gauge and forecast growth, and the figures for one can be used to extrapolate the other – if you offer monthly subscriptions then you can annualize the recurring revenue by simply multiplying by twelve to get to the annual revenue, and likewise you can divide the annual by twelve to get to that revenue figure.
The most obvious difference between the two is clearly the amount of time that clients for which clients are paying for subscriptions. Each is calculated by multiplying the number of customers by the amount of the subscription to yield the amount of revenue expected. If several plans are offered at different price points, then you calculate the revenue for each and add them together.
When you want to forecast future revenue, it makes sense to use the current numbers as a base, but in order to do so, you have to assume that you will neither lose nor gain subscribers and that subscribers will not change from one of the plans you offer to another.
How to Apply MRR and ARR Numbers
Though the MRR and ARR numbers can easily be translated into one another, that does not mean that they are used in the same ways. SaaS companies use their annualized figures to assess anticipated revenue and for future planning, while monthly figures are more useful for comparing sales and marketing performance and progress. They allow management to gauge customer satisfaction, as you can track cancellations and upgrades more easily, while the annual numbers are more useful to present to investors in order to reflect overall growth and stability.
Both should be tracked and readily available so that both of these applications can be used, but there are important elements that need to be noted in order to ensure that you’re not including losses or extra revenue sources that can create confusion or skew results. These include one-time events such as promotions.
Though these may help overall revenue, they can lead to inaccurate projections if included. Conversely, if customers upgrade to plans that provide higher levels of service (and cost them more), this revenue can be reflected in monthly numbers as well as annualized or use in projections: they also effectively offset losses from cancellations (known as churn) or from customers downgrading, which also needs to be reflected in each month’s numbers.
Though monitoring and recording your monthly and annual revenue is laborious, it is one of the most effective ways to generate data that can assess performance, guide future planning, and assist with attracting investors.
If you need assistance with tracking recurring revenue and applying the information that you’ve collected, we can help. Contact us today at 551-249-1040 to learn how managing your financial data will help you achieve your goals.
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