In the world of business, one is constantly bombarded with statistics, insights, and metrics. Knowing how to utilize them to grow your business and overcome its shortcomings is crucial for all business owners.
However, not all metrics are created equal, and some can be more valuable than others. One such metric is that of “Annual Recurring Revenue” or ARR.
In today’s article, we will look at what ARR is, why it is important, and how certain tools can help skyrocket your annual recurring revenue.
What is ARR?
ARR refers to the amount of revenue your business (typically one that runs on a subscription model) can expect to generate from customers in a year. It involves a simple calculation where you take your monthly recurring revenue (MRR) and multiply it by 12.
Here’s an example:
Suppose you are a B2B-oriented company, and you have 100 clients that purchase a subscription worth $1000 per month. 100 x $1,000 is $100,000. This figure is your MRR.
- To find your ARR, you will multiply $100,000 by 12.
- $100,000 x 12 = $1,200,000
- Your ARR = $1,200,000
ARR is used to measure the performance and growth of a subscription-based business.
This metric is most commonly used in the context of SaaS (Software-as-a-Service) business.
SaaS refers to the widely prevalent online subscription model that most businesses adopt these days. Common examples of SaaS providers are Salesforce, the popular CRM platform, Dropbox, the cloud storage service, Zoom, the video conferencing platform, and Spotify, the music streaming service.
Each of these companies operates on a SaaS model and relies on monthly subscriptions from customers to generate revenue.
The Importance of ARR and the Role of Subscription Billing Platforms
Okay, we have now understood what ARR means and how it is calculated. But how does awareness of ARR help your business?
As a business owner, tracking and being aware of your ARR is essential. It is a metric that offers a clear and objective picture of how your business performs over time. More importantly, it helps you understand what is working in your business model by revealing which subscription models are underperforming and need to be tweaked to be more attractive.
By comparing ARR reports over a specific period, you can easily measure your business’s growth. It is also a more useful metric than total revenue since it limits the factor to the actual services you offer. ARR also allows you to predict future revenue to an extent.
Read also this related FintechZoom article: Top 8 Types of Financial Software to Build a Successful FinTech Startup.
With that said, as a business owner, you will obviously want to look at ARR as one out of several vital metrics like customer and revenue churn, acquisition costs, customer health score, and more.
It can be easy to focus on one metric because it paints a comfortable picture, but the ability to view the larger context is crucial to effective revenue management.
Subscription Billing Management: The Key to Maximizing ARR
Sure, the quality of your service and marketing are important factors when it comes to boosting revenue. But one of the most effective tools you can use to increase your ARR is a robust subscription billing service.
Business owners are quickly recognizing its impact, which is why the subscription billing management market size is poised to hit $14.1 billion by 2028. The demand is here, and it is here to stay.
These billing platforms have proven their worth through their effectiveness in making the entire subscription process frictionless for customers and clients.
They are also invaluable in their ability to organize and provide error-free customer data. Some examples of such data types are customer purchase history, price data, product feature data, financial data, and AAR/MRR data.
The quality of said data also matters. According to Kissmetrics, poor-quality data results in an average revenue loss of 20% for individual companies. It is because low-quality data often leads to poor decision-making.
This is where subscription billing platforms come in handy. They don’t just organize and collect accurate data. They can also help interpret it.
Proper data analysis can provide your business with actionable insights. This can involve discovering overlooked problem areas in your business model or insights on adjusting pricing according to market trends. Some platforms also make use of machine learning (ML) models to provide customized solutions according to your needs.
The amount of revenue you gain by utilizing these insights and analytics is immense.
The automation aspect also makes revenue generation easier. James Messner, Forbes Councils Member and veteran of global enterprise software, discusses how the automation that occurs as a result of subscription models reduces the processing needed by different departments and delivers a seamless experience for customers.
Aspects like automated withdrawals can be one of the best ways to positively influence your client’s decision-making process (when done in a transparent manner, of course).
As a result, clients are more likely to remain subscribers and recommend your business to other people.
When paired with robust customer service, you end up with a world-class service experience that drives revenue up, unlike anything else. For these and a myriad of other reasons, subscription billing platforms are poised to be dominant in the B2B and B2C segments.
Conclusion
The rise of SaaS models and their reach has already changed the ways businesses deal with their individual customers as well as business clients. We are reaching a point where optimizing every business aspect for productivity and user experience has become the norm to stay competitive.
Such optimization is near impossible to achieve without the use of subscription billing platforms that allow business owners and decision-makers to easily understand and take action to increase ARR based on the metrics and interpreted data they can now access.
