ARR stands for Annual Recurring Revenue, which is a metric used to measure the predictable and recurring revenue generated from customers on an annual basis. Although all businesses should calculate this, it is an incredibly valuable metric for subscription-based services & products.
How do you calculate ARR?
It is calculated by multiplying the average monthly recurring revenue (MRR) by 12.
For example, if your product has an average MRR of $10,000, its ARR would be $120,000.
Why should you calculate ARR? 🤘🏼
Improved Revenue Prediction 💰
ARR helps you forecast and plan your revenue streams more accurately. It will help you plan your resources, investments, and growth strategies accordingly. It may also help you prioritize your hiring, acquisition, and other growth plans.
The best metric to understand business valuation 🏦
ARR is one of the top metrics, both investors and potential consider when evaluating the value of your business. Higher ARR simply translates to a higher valuation in all subscription business models.
ARR is used to calculate CLTV ⏳
This is incredibly important while calculating your Customer Lifetime Value, which is the total revenue you can expect from a customer over the time they stay with your business.
Help you with financial planning and reporting to key stakeholders 🤝
Tracking your ARR provides you with a consistent and predictable revenue stream. It helps you
Monitor your financial health
Make revenue projections
Report your top-line performance to stakeholders like
Other heads of departments etc
How can you increase your ARR?
Increasing ARR is about more than just adding more customers to the Top of the Funnel. Although increasing TOFU more often than not solves ARR, it’s not a vitamin, but a painkiller. Increasing ARR consistently requires a strategic & structured approach. It relies on
Acquiring new customers
Retaining existing customers
Improving the product & customer experience
Expanding revenue opportunities
By expanding into new markets
Cross-selling similar products
Offering customized product upgrade packages
We’ve broken down all the levers into detailed sub-levers below 👇🏼
1. Acquire new customers 🫂
Double down on existing channels ✖️
The easiest way to improve your TOFU is by doubling down on all the existing marketing channels for your product. The idea is to prioritize the existing channels based on the CAC - LTV ratio. Doubling down on existing channels usually involves
Increasing the budget on that channel
Training the team or hiring more team members
Purchasing new tools to improve the outcomes
Exploring new acquisition channels 🪂
This is the next natural step when thinking about improving your TOFU. Bringing in new customer acquisition channels can always be done in two ways based on the strengths of your existing team
Hire an agency → If no one on your team has the knowhow or the technical expertise on a specific channel.
Build a team → Do this if you or someone on the team has some knowledge or has worked on this acquisition channel before. A smarter way to go about this is hiring a proven expert and giving them the autonomy to build a team under them.
Improving the onboarding on your product always leads to higher activation rates → higher retention rates & increased ARR. If your TOFU is already solved, one of the lowest-hanging fruits for your product is onboarding.
Some questions to think about to improve your onboarding 👇🏼
1. What are the steps I can remove to help the user experience the core product faster?
2. What are the technical errors I can solve to improve the onboarding?
3. What are some ways to customize the user onboarding for each user?
Customer Success 🫂
Focus on providing exceptional customer experiences and support from the get-go. Ensure your customers receive value from your subscription service by addressing their needs, promptly resolving issues, and maintaining open lines of communication. Doubling down on FAQs, and explainer videos is also something you can do to improve customer success.
3. Expand your revenue opportunities 🤑
Upselling and cross-selling 🪝
Identify opportunities to upsell or cross-sell additional features, add-ons, or higher-tier subscription plans to your existing customers. Analyze their usage patterns and offer relevant upgrades or maybe even complementary services.
Expand into newer markets ✔️
Expanding your target market or exploring new customer segments is also a quick way to increase your ARR.
Are there any untapped opportunities or problems that you can solve with your existing products?
If yes, how do you build GTM plans to reach these new segments?
4. Reduce churn 🤪
Perform Churn analysis 🤔
Analyze the reasons behind customer churn and identify patterns or common pain points. Address these issues proactively by improving product features, upgrading your customer support experience, and doubling down on overall user experience.
Offer retention incentives 🤗
While churn analysis can prevent risks, incentives can help you bring back churned users. Loyalty discounts, extended trial periods, or exclusive features can bring back customers who have churned or are at risk of churning.
5. Optimize your product pricing 📈
Implement value-based pricing 🖖🏼
Ensure your pricing reflects the value your product delivers to customers. Truly think about the perceived value of your product in the market.
Is there something you can do to improve the perceived value of your product?
Can you change your product pitch and positioning to improve your perceived value?
Can you enter a newer market or target a new customer segment to improve the perceived value?
Optimize your plans for different use cases 💪🏼
Evaluate your subscription plans and figure out ways to cater to different customer segments. Consider bundling complementary features or offering tiered pricing plans to cater to various use cases and budgets.
There are two ways to go about it
Go down the market with a lower-priced plan
Go up the market with a higher-priced plan
These optimizations come with their own challenges, including GTM strategies, team structures, budgets, etc…
The conversion rate measures the percentage of potential customers who convert into paying customers. By analyzing the conversion rate at various stages of the customer journey, such as from a free trial to a paid subscription or from lead to customer, you can identify opportunities to optimize your product and user experience to eventually improve conversions.
Average Revenue per User (ARPU) 💲
ARPU represents the average revenue generated per user or customer. By increasing the ARPU, either through upselling, cross-selling, or higher-priced subscription tiers, you can directly and quickly impact your ARR.
Customer Churn Rate ☹️
The churn rate refers to the percentage of customers who cancel or stop using your product within a specific period. High churn can significantly impact ARR as it leads to lost revenue and customer attrition.
Product & feature Adoption metrics 🫂
Metrics related to product adoption, such as DAU, WAU, MAU, feature usage, or time spent on the product, can indirectly impact ARR. A product that delivers high value, fosters engagement, and encourages high usage frequency is more likely to retain customers and generate recurring revenue.
Customer Lifetime Value (CLTV) 💰
CLTV represents the total revenue a customer generates over their entire relationship with your business. By understanding and optimizing CLTV, which includes factors like average subscription length and average revenue per period, you can enhance the long-term revenue potential of your customer base and thus impact ARR.
Net Promoter Score (NPS) and other customer satisfaction metrics 💊
While not directly tied to revenue, customer satisfaction metrics like NPS can influence customer loyalty. This leads to improved word-of-mouth referrals, and ultimately higher customer retention.
P.S: If you loved reading about this growth metric, you will find this list of 23 growth metrics incredibly helpful 💪🏼