Annual Recurring Revenue and How to Calculate ARR
What is ARR
ARR, or Annual Recurring Revenue, is a key performance indicator (KPI) commonly used by subscription-based businesses to measure the value of their recurring revenue streams. It represents the total value of all active subscriptions at a given point in time, and is typically calculated on a monthly or annual basis.
One of the main benefits of using ARR as a metric is that it provides a clear and consistent way to track the growth of a business over time. By comparing ARR from one period to another, businesses can easily see whether they are gaining or losing subscribers, and can adjust their strategies accordingly.
In addition to tracking the growth of a business, ARR can also be used to forecast future revenue and identify trends in the market. For example, if a business is seeing a decline in ARR over time, it may be an indication that the market is becoming saturated or that the product is losing its appeal. On the other hand, if ARR is steadily increasing, it could be a sign that the business is gaining market share and could potentially be a good time to invest in expansion or new product development.
The difference between ARR and MRR
Annual Recurring Revenue (ARR) and Monthly Recurring Revenue (MRR) are both financial metrics that measure the amount of revenue a company can expect to receive on a regular basis. However, there is a key difference between the two: the time frame over which the revenue is measured.
ARR measures the amount of revenue a company can expect to receive on an annual basis from its subscription-based services. It is calculated by multiplying the number of paying customers by the average price of the company’s products or services, and then multiplying that number by the number of years in the subscription term.
On the other hand, MRR measures the amount of revenue a company can expect to receive on a monthly basis from its subscription-based services. It is calculated by multiplying the number of paying customers by the average price of the company’s products or services, and then dividing that number by the number of months in the subscription term.
For example, if a company has 100 paying customers, each paying $100 per month for a 12-month subscription, the company’s MRR would be $12,000. The company’s ARR would be $12,000 x 12 months = $144,000.
Both ARR and MRR are important financial metrics for companies operating in the subscription-based business model, as they provide a predictable and stable source of income. However, MRR is typically used to track the short-term performance of a company, while ARR is used to track long-term performance and growth potential. Read the following article to learn more on what is MRR.
How to calculate ARR
There are a few different ways to calculate ARR, depending on the specific needs of the business. One common method is to take the total number of active subscribers and multiply it by the average revenue per subscriber (ARPPU) for a given period.
ARR = Total Number of Active Subscribers x ARPPU
For example, if a business has 1,000 subscribers paying an average of $50 per month, the ARR would be $50,000 per month or $600,000 per year.
ARR Movement
ARR Movement, also known as ARR Churn or ARR Net Change, is a financial metric that measures the change in a company’s Annual Recurring Revenue (ARR) over a specific time period. It is calculated by subtracting the ARR at the end of the period from the ARR at the beginning of the period, and is typically expressed as a percentage.
For example, if a company’s ARR at the beginning of the month is $100,000 and its ARR at the end of the month is $110,000, the company’s ARR Movement for that month would be $10,000, or 10%. A positive ARR Movement indicates that the company’s ARR has increased over the period, while a negative ARR Movement indicates a decrease in ARR.
ARR Movement is an important financial metric for companies operating in the subscription-based business model, as it provides insight into the performance and growth of the business. A positive ARR Movement can be a sign of a healthy and expanding business, while a negative ARR Movement may indicate that the company is losing customers or experiencing pricing pressures. By tracking and analyzing ARR Movement over time, companies can make informed decisions to drive growth and long-term success.
How to track ARR for mobile apps
To use Qonversion for ARR reporting, companies can connect their subscription billing and payment data to the platform. Qonversion will then automatically calculate the company’s ARR and other key metrics, and provide detailed reports and charts to help the company understand its financial performance and growth.
In addition to tracking and reporting on ARR, Qonversion also offers a range of other features to help companies manage and optimize their subscription business. These features include automatic revenue recognition, subscription churn trends, real-time dashboards, among others. All main subscription charts are available for free.