For those seeking to achieve better use of the — often scarce — available resources in more efficient
actions, it is essential to pay attention to some indicators .
Whether to increase sales or strengthen communication actions, metrics — such as ARR (Annual
Recurring Revenue) — will help you understand the future scenario of your organization.
And the ARR is used to estimate your company’s future income based on the number of
subscriptions obtained .
Ultimately, planning is essential to be able to organize internally and define, for example, which areas
need more resources or what needs to be improved so as not to harm the financial health of your business.
Therefore, we will cover the following topics below:
- What is ARR?
- Why calculate that metric?
- How to calculate ARR?
Want to know more? Keep reading to clear up all your doubts!
What is ARR?
The free translation of ARR into Spanish is costa rica phone number list something close to ” annual recurring revenue .”
And, in practice, it is the indicator that will allow a better understanding of the expected income for a
period. That is, it allows us to know how much income will be generated according to the
number of clients in the database .
To explain further, a practical example makes this concept easier to understand, and Netflix serves as
a good example of how this metric works.
In this case, the ARR is calculated based on the number of subscribers, both:
- Upsell , that is, those users who subscribed to a more expensive plan;
- Downgrades, who has reduced the price of their monthly rates;
- And, of course, the dreaded churn rate .
By adding up revenue and losses — in the case of churn — Netflix can calculate its ARR, meaning it
knows how much it should bill its subscribers over a year.
Thus, this forecast serves to understand whether your strategies are, in fact, moving in the direction
that your organization expects.
If your ARR is declining significantly over a period of time, for example, that can be a strong indicator that your customer retention and loyalty efforts are not being as effective.
On the other hand, this KPI can be very useful to get investors or partners, gaining more confidence in the market with positive numbers.
It is also important to understand that ARR is a long-term view, however, that same calculation can be done in smaller proportions. How?
Well, through MRR (Monthly Recurring Revenue) , it is possible to identify the same forecast for a shorter period, which can be useful if you need short-term actions.
Why calculate that metric?
Now, why should you closely monitor your company’s ARR?
Below you will learn some of the advantages of keeping an eye on this KPI. Let’s take a look!
Helps predict future income
We do not yet have the ability to predict and beyond what is the stop the future, however, it is
possible to more accurately predict the income your company will have .
The ARR guarantees greater control over the resources that will be received, thereby facilitating
internal organisation so that, for example, your business can grow in a more efficient and precise manner.
With ARR, you can also define goals for your business, i.e. what needs to be improved internally to achieve even better results.
You can, for example, establish numbers that your team will achieve in terms of profits or sales,
thereby identifying the main needs for the long-term success of your organization.
Gaining market trust
ARR is also a way to gain the trust of the b2b reviews market you are in, whether to close new partnerships or to get more investors.
In the end, when you have promising numbers for the year, it’s easier to convince investors and clients to trust in your company’s potential, right?
How to calculate ARR?
The good news is that calculating ARR is not complicated to perform, and so that you don’t waste
time and start tracking this KPI, we explain the formula below:
Total resources generated with annual subscriptions + Total resources generated with
new customers and upsells – Total resources lost with downgrades – Total resources with lost customers = ARR
It’s not that complicated, right? Even the calculation of ARR can also be done by multiplying the numbers generated in the MRR.
In practice, the calculation to be performed is the same, just reducing the period to one month and not the entire year. Then, simply multiply the number obtained by 12 and you will also have access to your annual recurring income.
Therefore, if you want healthy growth for your company and the ideal financial conditions to withstand constant competition in the market, monitoring this metric is essential .
By calculating the ARR, you can more accurately identify the best directions for your future investments.
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