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What is ARR in SaaS and Best Tips to Grow it in 2023?
Financing
As software as a service (SaaS) business model becomes more common, it is important for B2B SaaS businesses to know key measurements that can affect success. One of these is ARR, or annual recurring revenue. In this article, we will explain what ARR is and why it matters in SaaS. We will also provide actionable tips and methods for you to grow your business ARR in 2023 and beyond.
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What is ARR?
ARR is a way to measure the expected revenue a company will receive from customers who pay on a recurring basis over a year. It includes all income earned from paid customers who have subscribed to the service at a particular point, but excludes any one-time payments or fees.
How to Calculate ARR
To know your SaaS ARR and use it for future revenue forecasting, you need to calculate it via a formula. While some companies count it by simply multiplying Monthly Recurring Revenue (MRR) by 12, we prefer a more precise approach. Here`s the complete formula to calculate ARR:
ARR Calculation Example
Let’s say a SaaS company has 500 active customers who pay a monthly subscription fee of $100, generating a total subscription revenue of $50,000 per month or $600,000 per year. During the year, 50 of those customers upgraded their subscription levels, generating an additional $25,000 in ongoing revenue for the year. However, 20 customers canceled their subscriptions, resulting in a revenue loss of $2,000 per month or $24,000 per year.
To calculate the company’s ARR using the formula, we can plug in the numbers:
ARR = ($600,000 + $25,000) – $24,000
ARR = $601,000
Therefore, the company’s ARR for the year is $601,000, which shows the expected predictable and recurring revenue for the next 12 months from their existing customer base.
To determine your ARR using this formula, you need to sum up the revenue obtained from all your active customers who subscribed in a year. You also need to add any additional revenue from existing customers who upgraded their subscriptions during that period and subtract the revenue lost from churned or canceled subscriptions. Be sure to include both new and existing recurring subscriptions, as well as upgraded or downgraded accounts, but exclude one-time upgrades or non-recurring charges.
Why ARR matters in SaaS
- ARR helps you understand how a business is doing in certain areas and why. For instance, where revenue is increasing or decreasing and what are the reasons.
- By using ARR data, you can make better decisions about employees, finances, and operations to improve your bottom line and make your company more efficient.
- ARR provides insights into what customers want and need, which can lead to better cross-selling and up-selling.
- ARR forecasts revenue, which helps manage expenses more accurately and maintain cash resources.
- Monitoring ARR can help retain top sales talent, and reward employees who perform well.
- Investors prefer businesses with ARR because they have more predictable revenue streams, accurate forecasting, and contractually-obligated revenue, which is better than relying on one-time sales.
Top 3 Tips to Grow ARR
1. Increase user base
As your company acquires new customers, the total amount of revenue generated by the user base increases, resulting in a higher ARR. Furthermore, by growing the user base, there are more opportunities to cross-sell and upsell products or services.
Here are some ways to grow your user base:
- Revamp sales strategies
- Offer promotions and discounts
- Participate in industry events [link to the SaaS events article]
- Use search engine optimization (SEO)
- Collaborate with other businesses
- Implement referral program
- Improve customer experience
If you think the last point is the least important, you are wrong. ChatGPT had an average of about 13 million unique visitors per day in January, more than double the levels of December. Adam Conner, Vice President for Technology Policy at the Center for American Progress, stated that ChatGPT gained rapid popularity due to its unique feature of being one of the first AI technologies available to the public in an understandable manner.
2. Expand into new markets
Expanding into new markets can be a game-changer for your SaaS business. By not limiting yourself to just one market or geography, you can grow your ARR significantly. This is because different markets have different needs and preferences, and by expanding your reach, you can adapt your solution to meet those needs and provide more value to your customers.
To successfully expand into new markets, you can do the following:
- Research potential markets to identify ones with the highest potential.
- Develop a go-to-market strategy that includes the right channels for marketing and sales efforts, and a timeline for implementation.
- Build a local presence by creating pages specific to those locations, optimizing them for local SEO, and using country-specific keywords.
- Adapt your solution to better meet the needs and preferences of customers in your newly targeted markets or geographies.
Spotify is a prime illustration of how a company can succeed on a global scale. Statista’s data shows that while Spotify is a Swedish-based company, the majority of its paid users are not located in its home country. In fact, Swedish users make up just 49% of its global subscription sales. The rest of its paid plans are mostly located in Mexico, making 46% of the total. Without this global expansion, Spotify would lose more than half of its subscription revenue, highlighting the importance of going beyond one’s local market.
3. Offer annual plans
By offering annual plans, you can not only increase your ARR, but also improve customer retention and loyalty, as customers who commit to a longer-term subscription are more likely to remain customers in the future.
To offer annual plans, you can follow these steps:
- Decide on the price for your annual plan.
- Set up an annual subscription plan in your SaaS platform.
- Promote the plan through various channels.
- Encourage customers to switch by offering incentives.
- Implement Comfi to provide customers with Buy Now Pay Later service.
- Keep track of usage and engagement rates.
- Send out renewal reminders.
By offering Buy Now Pay Later (BNPL) services to your customers, you can provide them with an added layer of flexibility and convenience while purchasing your product without having to go through a lengthy credit application process. By integrating Comfi into your checkout system, you can offer your users and potential customers the option to pay for an annual plan in 12 manageable installments spread over 12 months. You will receive the full payment for the plan upfront within seven days of the purchase being made.
This allows you to immediately boost your revenue, providing your business with a much-needed cash injection. By offering BNPL through Comfi, you can accommodate customers who may not have the financial means to purchase an annual plan upfront, increasing your customer base and revenue in the process. Take a look at statistics for working with Comfi:
Want to know more ways to grow your B2B SaaS ARR? Read this article!
In Сonclusion
ARR is an important metric for measuring revenue generated from subscription-based services in SaaS. To grow ARR, businesses need to focus on acquiring new customers, expanding into new markets and offering users annual subscriptions. By keeping these tips in mind, your SaaS company can continue to grow ARR and achieve long-term success.
Let’s talk your revenue together
Amal Abdullaev
Co-founder at Comfi
Amal Abdullaev
Co-founder, Head of Sales
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