When you run a business, there are certain terms that you’ll need to know if you want it to be successful. One of these terms is ARR, which is an abbreviation for Annual Run Rate and Annual Recurring Revenue. But what is it exactly?
ARR is Annualized Run Rate, which is a company’s MRR multiplied by 12. It can also stand for Annual Recurring Revenue, and it is the total recurring subscriptions of a business for one year. Businesses use this metric to determine the health of a company and where they need to improve.
Businesses survive based on recurring and new revenue. If your business is struggling, learning what ARR is and how to increase it can mean the difference between failing or succeeding. Stick around, and we’ll get through this.
Annual Recurring Revenue further explained
Annual Recurring Revenue considers all the subscription-based revenue for the entire year. While this might seem as simple as multiplying all monthly subscriptions by 12, that’s not exactly how it works. In all actuality, ARR considers only those contracts that last for at least a year, if not more.
Unfortunately, this definition doesn’t include partial subscription revenues nor allows for contracts that might end in the middle of a year.
Is MRR the same as ARR?
MRR is not the same as ARR because MRR revenue comes only from monthly subscriptions. Looking at your monthly recurring revenue can give you a more immediate view of how your company is doing, so you can quickly adjust your strategies before you lose more money.
When you check your monthly balances and see that you’re not making as much money as you thought, you can begin immediately to increase your bottom line instead of waiting for the next year to increase your revenue.
Annual Run Rate vs. Annual Recurring Revenue
Now there is some friction in the business world about the ARR acronym because some people want to include all revenue in their metrics, while others want to stick to the original meaning of the acronym and keep only that revenue that comes from yearly recurring contracts.
Annualized Run Rate includes all recurring revenue, whether it occurs monthly or yearly. And for many companies, this might be an easier metric to measure their bottom line, as it accounts for all revenue.
- Annual Run Rate – All recurring revenue including monthly and yearly
- Annual Recurring Revenue – Only yearly recurring revenue (such as yearly plans)
How does SaaS Insights calculate ARR?
SaaS Insights calculates ARR by totalling up your MRR by 12. See more about how SaaS Insights calculates MRR.
While the original definition of ARR only includes recurring revenue from yearly contracts or subscriptions, new definitions are slowly taking over in the business world. New or startup businesses are using Annualized Run Rate, which helps them get a better picture of their revenue streams rather than yearly contracts.
Either way, you slice it, using one of these metrics will help you get a better handle on your business health.
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How Do We Calculate MRR?