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Using MRR and ARR to Monitor and Forecast SaaS Subscription Revenue

Revenue Forecast
Revenue Forecast

Estimating and projecting future revenue is one of the most important tasks that a SaaS company must do each year. Tracking both your monthly and annual subscription revenue is one of the most effective ways to do this, as it strongly reflects customer growth. Let’s take a look at the correct way to do both.

Calculations will largely depend upon the structure of the subscription model. SaaS companies may offer either monthly or annual subscription plans with multiple levels of each from which customers can choose. These variables will make a big difference in the calculation and use of metrics.

Monthly Recurring Revenue and Annual Recurring Revenue

Every company can choose whether to use their Monthly Recurring Revenue (MRR) or their Annual Recurring Revenue (ARR) to gauge and forecast growth, and the figures for one can be used to extrapolate the other. That is, if you offer monthly subscriptions, then you can annualize the recurring revenue by multiplying by twelve to get to the annual revenue. Likewise, you can divide the annual by twelve to get to the monthly revenue figure.

The most obvious difference between the two is the amount of time for which clients are paying for subscriptions. Each is calculated by multiplying the number of customers by the subscription amount to determine the amount of revenue expected. If several plans are offered at different price points, then calculate the revenue for each and add them together.

When forecasting future revenue, it makes sense to use the current numbers as a base, but doing so assumes that the company will neither lose nor gain subscribers and that subscribers will not change from one plan to another.

How to Apply MRR and ARR Numbers

Though the MRR and ARR numbers can easily be translated into one another, that does not mean that they are used in the same ways. SaaS companies use their annualized figures to assess anticipated revenue and for future planning, while monthly figures are more useful for comparing sales and marketing performance and progress. MMR numbers allow management to gauge customer satisfaction, as you can track cancellations and upgrades more easily. On the other hand, ARR numbers are helpful to present to investors as a reflection of overall growth and stability. Both should be tracked and readily available for use in both of these applications. However, there are important elements to consider in order to exclude losses or extra revenue sources that can create confusion or skew results. These include one-time events such as promotions. Though these may help overall revenue, they can lead to inaccurate projections if included. Conversely, suppose customers upgrade to plans that provide higher levels of service (and cost them more). In that case, this revenue can be reflected in monthly numbers as well as annualized or used in projections: they also effectively offset losses from cancellations (known as churn) or from customers downgrading, which also needs to be reflected in each month’s numbers.

Though monitoring and recording your monthly and annual revenue is laborious, it is one of the most effective ways to generate data that can assess performance, guide future planning, and assist with attracting investors. If you need assistance with tracking recurring revenue and applying the information that you’ve collected, we can help.

Contact us today to learn how managing your financial data will help you achieve your goals.

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