What is Live ARR?
ARR refers to the recurring annualized revenue generated by a business from its customers’ subscription payments excluding one-time payments, such as implementation, setup or professional fees. As such, ARR is the sum of the annual subscription revenue from all active subscribers, minus any discounts or refunds.
What is the difference between CARR and ARR?
ARR : Annualized recurring revenue from customers who have “gone live,” – after implementation and able to use the solution. In that case, ARR will be recognized based on a deal’s service start date.
CARR (Committed ARR): Annualized recurring revenue from customers who are waiting for implementation.
If the difference between the commitment date and the service start date is not insignificant (less than 3 months) and the company’s policy allows it, the ARR can be calculated based on the CARR (commitment date =booking date), in this case ARR will be equal to CARR.
CARR should always be equal to or greater than live ARR.
Why is it important to track ARR?
- It helps in forecasting future revenue.
- It provides insight into the company’s financial health and stability, especially for high-growth startups that are burning cash.
- It provides investors and stakeholders with a crucial metric with which to assess the company’s growth and performance.
How Live ARR is Calculated?
- First you need to define the company’s ARR policy and it is just as important to stay consistent, unless-there is a substantial change in deals/ customers type.
- Then you can determine the total amount of revenue that your business expects to generate from its active recurring revenue streams over the next 12 months. This can include revenue from subscription-based services, annual contracts, and other recurring sources of income.
- Take care to ensure that only active and recurring subscriptions are included.
- Adjust any expected upsell, downsell or churn (cancellation) that might affect future revenues.
Factors Affecting Live ARR
- New subscriptions increase Live ARR (New ARR).
- Upselling or cross-selling to existing customers can boost Live ARR (Expansion ARR).
- Loss of customers or downsell negatively affects Live ARR (Churn/Downsell ARR).
Common Challenges Calculating Live ARR
While calculating ARR may seem straightforward, there are several common challenges that businesses may face and that impact the accuracy of ARR calculations.
- Data Source & Management – Inconsistent data sources or ARR recognition method, differences in revenue recognition practices, and changes in pricing or packaging.
- Complex Contracts – Customer diversity or complex contracts might make it difficult to standardize ARR calculations. One example of complexity around the ARR calculation is multiple revenue streams. While subscriptions should obviously count as recurring revenue, maintenance and support revenue can be tricky. These are recurring revenues in a certain sense because they require customers to keep paying for them on an ongoing basis; however, they are more like “add-ons” to license/ service sales.
In Conclusion
Calculating ARR is a critical KPI for any business looking to measure its revenue growth. By understanding the nuances of ARR calculations and being mindful of the common challenges that can arise, businesses can ensure that their ARR data is accurate and reliable, and they can use it to make more informed decisions about growth strategies.