Whether you’re a sales leader, a manager, or a rep, revenue is your ultimate bottom line, your guiding compass, your metric for success. With it, you can evaluate the performance of your business, team, and individual contributors.
Subscription-based businesses differ from the traditional models, and as such, need their own metrics. But when you’re looking at ways to gauge your revenue, it ultimately boils down to MRR vs ARR (Monthly Recurring Revenue vs Annual Recurring Revenue). Recurring revenue is the heart of SaaS companies; with it, you don’t have to worry about one-time sales that may or may not repeat.
What is Monthly Recurring Revenue (MRR)?
The monthly recurring model lets companies look at revenue trends over time to compare the MRR to the monthly signup rate for their offerings, customer retention, and monthly account growth rate.
This analysis will always give you an accurate status update on your company’s performance; letting you know whether your revenue is growing or shrinking.
What is Annual Recurring Revenue (ARR)?
ARR is an essential metric for SaaS businesses; with it, companies can see how much recurring revenue they can expect based on yearly subscriptions.
MRR vs ARR: Calculating Success
What is the formula to calculate your MRR? It’s simple.
# of customers * average billed amount/month = MRR
For example, if you have 100 subscribers, and each customer pays an average of $10 every month; you’ll have a monthly recurring revenue of $1,000.
100 customers * $10/month = $1,000 MRR
To calculate your ARR, all you have to do is apply the same formula and multiply the MRR by 12.
(# of customers * average billed amount/month) *12 = ARR
MRR vs ARR: Choosing The Right One for your Business
Businesses that follow subscription models are different from traditional ones; when choosing between MRR vs ARR, there are a few things you should consider:
- Intention: The most important thing when deciding between the ARR or MRR business models is your intention. ARR is great for calculating and tracking long-term growth, while MRR is excellent for short-term planning, gauging new strategies’ success, and monitoring seasonal trends and fluctuations.
- Business Size: The size of your business should factor into your decision. MRR is great for smaller companies that are making regular changes and tweaks to their platform in that it allows them to track precisely how said changes are impacting their overhead month-to-month. On the other hand, the ARR model is typically used by larger enterprise businesses that generally have yearly contracts rather than monthly ones.
- Subscription Length: What is the duration of your subscription offerings? Whether your subscription runs monthly, quarterly, or annually is a good indicator of which metric will work best for your company.
- Subscription Model Complexity: As your business scales, you’ll start implementing more complex subscription models. Depending on the complexity level, following an ARR model will give you a better overview of how your business is running.
- Investor Interest: If your goal is to target investors, it’s useful to note that they prefer the ARR model. Give them a bigger picture of how the business is doing; ultimately, all they care about is the bottom line when evaluating your business.
Food For Thought:
Understanding which recurring revenue model is best suited for your business and strategically implementing changes to keep developing is the best way for your company to continue improving its revenue streams.
Your revenue is your bottom line, and nothing is more significant to your business than deciding on a model to move forward. But keeping track of the numerous metrics and their calculations can take precious time away from your business, and we know that your time is better spent elsewhere.
A true citizen of the world, Reef is a Marketing Manager at Pelcro who’s diving headfirst into the sea of information surrounding subscription memberships. Reef’s ultimate goal in life is to travel the globe, live in as many different countries, and experience as many different cultures as possible.