The Significance Of ARR For Businesses
ARR gives businesses an estimate of their future recurring revenue, enabling them to understand their financial health clearly. It is a valuable metric for forecasting, budgeting, and analyzing the company's financial statements. ARR also helps businesses to understand their customer retention rate over a period of time. For startups, ARR serves as a benchmark for growth and an essential factor that investors look into before investing. Thus, ARR helps your business identify growth opportunities, increasing customer lifetime value and revenue growth.
Measuring ARR is relatively simple. First, you need to calculate the average monthly recurring revenue by dividing the total monthly subscription revenue by the number of subscribers. Once you have the average monthly recurring revenue, multiply it by twelve (months in a year) to get the annual recurring revenue. For instance, if your average monthly recurring revenue is USD 100 and you have 2000 subscribers, your ARR will be 100200012= USD 2.4 million.
Using ARR for Long-term Planning
ARR is an essential metric for long-term planning, especially for subscription-based businesses with a longer subscription duration. By tracking ARR, businesses can identify trends in their recurring revenue growth and the resulting revenue streams from specific customer segments. This understanding will enable businesses to make strategic decisions to improve customer acquisition and retention.
Understanding and tracking your organization's ARR is vital to the growth and sustainability of your business. The metric is valuable for forecasting, budgeting, analyzing financial statements, and planning. ARR will become even more critical to businesses as the subscription-based economy grows. Knowing your ARR will enable your business to make informed decisions and contribute to long-term success.
ARR is a simple yet powerful metric that businesses should prioritize tracking. It helps you understand the health of your subscription-based business and guides you in making informed decisions. If you have not already, start tracking your business's ARR today!