MRR vs. ARR – The right KPIs for your subscription business planning & forecasts
Published: November 21, 2024
For the subscription industry, MRR and ARR are at the core of data analytics to show impacts of pricing strategies, benchmarking, etc.
Monthly Recurring Revenue (MRR) – a definition
What does MRR mean and do?
The MRR indicates the revenue a company can expect to receive from subscriptions on a monthly basis.
Why do you need to track MRR?
It gives you a baseline to determine cash flow and revenue which helps you to plan and budget more effectively since you have clarity on the monthly revenue.
MRR can especially help you to counteract revenue slumps, adjust sales and marketing activities. In combination with other KPIs such as retention, churn and acquisition, it can also help identify issues within the subscription journey.
How do you calculate MRR?
The standard MRR is calculated by multiplying the amount of subscribers with the monthly subscription plan net price per user.
Example:
You have 67 subscribers for a subscription plan of 23€ in July.
23€ x 67 = 1541€ MRR
The Billwerk+ analytics dashboard for Billwerk+ Optimize has a slightly different approach to the calculation to acknowledge seasonal trends by including a monthly average over the last three months. It is therefore more reliable results on the expected revenue.
Example:
You have 67 subscribers for a subscription plan of 23€ in July, 69 in August, and 76 in September.
((67 + 69 + 76) x 23) / 3 = an average MRR of 1625,3€
This seasonal data can be leveraged to enhance your marketing and inventory planning.
MRR for Marketing
By identifying periods of peak or reduced subscription activity, you can time promotions, product launches, and marketing campaigns to coincide with customer behavior. For example, if your MRR historically dips in certain months, you can launch targeted retention campaigns or discount offers to keep churn in check.
MRR for Inventory planning
For businesses dealing with physical goods or services tied to subscriptions, understanding seasonal MRR fluctuations can help you optimize your inventory.
Knowing when demand is high allows you to stock up in advance, while slower periods can help you avoid overstocking, reducing waste and improving cash flow.
With these insights, merchants can not only respond to changes in demand but also proactively plan for growth, leveraging the power of seasonal data for smarter business decisions.
MRR – Variables & Challenges
- Discuss with your team if you want to include any additional recurring charges such as add-ons, surcharge fees, etc.
- Tracking discounts and free trial periods can be challenging, but it is essential to ensure accurate and reliable data
- So-called “amortized MRR” describe subscriptions paid for the entire year. Since you technically can’t count the full paid price as an MRR and it’s also not sure if the whole amount will be paid, it is being divided by 12 and allocated on a month-by-month basis until the end of the 12 months (this article by Buffer CEO Joel Casgoigne gives some great insights into why that is important).
Annual Recurring Revenue (ARR) – a definition
What is ARR and what does it do?
The ARR indicates the revenue a company can expect to receive from subscriptions on an annual basis.
Why do you need ARR?
ARR is especially helpful for long-term planning and strategic decision-making. It helps forecasting the expected annual revenue to plan marketing and sales activities as well as product developments and customer support projects.
The ARR from the past year is usually the baseline to calculate desired/realistic growth for the upcoming/current year and to compare overall revenue evolution.
Additionally, it is especially helpful for companies who mainly offer or have a big userbase for annually paid subscriptions (this usually covers a lot of B2B companies with more complex software solutions but also B2B service subscriptions, etc.).
How do you calculate ARR?
Simply multiply the MRR by 12.
Example:
Your MRR is 1541€.
1541€ x 12 = 18492€ ARR
To get a good overview of the expected ARR, the Billwerk+ analytics dashboard for Billwerk+ Optimize calculates the average MRR for the months that have already passed and multiplies it by 12. Additionally, it compares the forecasted ARR with any data from the previous year.
What is the difference between ARR and MRR?
In short: ARR helps you get a good overview on your annual recurring revenue and can help you with the definition of revenue goals and the overall forecasting whereas MRR provides a more in-depth look on recurring revenue trends such as seasonalities, etc. Additionally, MRR can act as a great warning call when something is amiss in the subscription lifecycle.
Accurate revenue forecasting through tools like Billwerk+ Analyze is essential for driving your business forward. By understanding your Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR) trends, you can make informed decisions across various functions of your business.
ARR for Marketing
With clear insights into projected revenue, you can allocate marketing budgets more effectively, ensuring your campaigns are aligned with revenue cycles and targeting the right segments at the right time.
ARR for Sales
Accurate forecasting helps your sales team set realistic targets and focus on high-impact opportunities. By knowing the expected growth or contraction in subscription numbers, sales teams can adjust strategies for upselling or expanding into new markets.
ARR for Product Development
For your product roadmap, revenue forecasting informs how much budget you can invest in innovation. By understanding recurring revenue trends, you can prioritize feature development that meets the evolving needs of your growing customer base.
Billwerk+ offers you a recurring revenue management solution to help you track ARR and MRR whether through smart data integrations or our own data dashboard Analyze for our subscription billing solution Billwerk+ Optimize.
Set up a demo to learn how Billwerk+ can help you optimize MRR, ARR, and get a 360° view on your overall business performance.
Sources:
- https://www.cobloom.com/blog/how-to-calculate-saas-arr-mrr#
- https://www.blackline.com/resources/glossaries/amortization-of-prepaid-expenses/
