Are you tired of feeling like you’re constantly chasing down new customers to uphold your business?
Shift your focus to two essential metrics to help you build a more stable and predictable revenue stream: Annual Recurring Revenue (ARR) and Committed Annual Recurring Revenue (CARR).
By understanding the difference between these two metrics and using them effectively, you can make smarter decisions, improve customer retention, and ultimately take your SaaS Financial Metrics to new heights.
Let’s break it down.
What is Annual Recurring Revenue (ARR)?
| Annual Recurring Revenue (ARR) is a metric that represents the annual value of all active subscriptions at a given point in time for a business. |
It is a crucial metric in the SaaS industry and it:
- Represents the annualized value of recurring subscription revenue from customers.
- Provides visibility into the predictable, recurring revenue stream.
- Used to measure the growth and health of a SaaS business.
Track ARR growth rate which is essential for SaaS companies to assess their performance and make strategic decisions.
It is calculated by taking the monthly recurring revenue (MRR) and multiplying it by 12. ARR provides a clear picture of your business’s current revenue stream, allowing you to gauge the health of your customer base and track growth over time.
By monitoring ARR, you can quickly identify trends in customer acquisition, retention, and overall revenue growth.
What is Committed Annual Recurring Revenue (CARR)
| Committed Annual Recurring Revenue (CARR) is a more comprehensive metric that takes into account the total value of all contracted customer commitments. It includes the future revenue from existing contracts. |
Unlike ARR, which only considers the current revenue stream, CARR factors in anticipated revenue from contract renewals, upgrades, and expansions over the next 12 months.
CARR provides a forward-looking view of your business’s revenue potential, allowing you to make more informed decisions about resource allocation, hiring, and growth initiatives.
It is especially valuable for businesses with longer contract terms, significant upsell opportunities, and those that target enterprise-level customers.
Why are ARR and CARR Important?
Tracking Annual Recurring Revenue and Committed Annual Recurring Revenue is crucial for several reasons. Here’s why:
How to Calculate Annual Recurring Revenue (ARR)
Calculating ARR is a straightforward process:
- Determine your monthly recurring revenue (MRR) by summing up the monthly subscription fees from all active customers.
- Multiply your MRR by 12 to get your ARR: ARR = MRR × 12
| For example, if your MRR is $50,000, your ARR would be $50,000 × 12 = $600,000. |
How to Calculate Committed Annual Recurring Revenue (CARR)
Calculating CARR is a bit more complex than ARR:
- Calculate your ARR as outlined previously.
- Determine the total value of committed future revenue from contract renewals, upgrades, or expansions within the next 12 months. This can be done by:
a. Review your current contracts and identify those set to renew within the next 12 months.
b. Assessing the likelihood of each contract renewal based on factors such as customer satisfaction, usage, and communication.
c. Estimating the value of each expected renewal, taking into account any anticipated upgrades, downgrades, or expansions.
d. Summing up the estimated values of all expected renewals.
- Calculate CARR using the formula: CARR = ARR + Total value of committed future revenue in the next 12 months
| For example, if your ARR is $600,000 and you have $200,000 in committed future revenue over the next 12 months (based on your assessment of expected renewals and their values), your CARR would be: $600,000 + $200,000 = $800,000 |
To further break down the process of finding the value of future committed revenue:
- Create a list of all contracts set to renew within the next 12 months.
- For each contract, assess the likelihood of renewal on a scale (e.g., 1-5 or low, medium, high) based on factors like customer satisfaction, product usage, and communication.
- Estimate the value of each expected renewal, considering potential changes in contract value due to upgrades, downgrades, or expansions.
- Multiply the estimated renewal value by the likelihood factor to get a weighted renewal value.
- Sum up all the weighted renewal values to determine the total value of committed future revenue.
By following these steps and regularly updating your CARR calculation based on the latest data and insights, you can gain a clearer picture of your business’s future revenue potential and make more informed decisions to drive growth and success.
ARR Vs CARR: Key Differences
When measuring a SaaS business’s financial health and growth potential, two key metrics stand out: Annual Recurring Revenue (ARR) and Committed Annual Recurring Revenue (CARR).
- The difference between ARR and CARR is that ARR is a total recurring revenue measurement of current, live contracts. While CARR takes into account details like new bookings and churn for contracts that are not live yet.
- CARR can tell you how much revenue you’re guaranteed based on your contracts, even if they’re not yet live.
- While both provide valuable insights, it’s essential to understand the distinct differences between them to make informed decisions and drive sustainable growth. Let’s dive into the key aspects that set ARR and CARR apart.
Key Differences between ARR and CARR:
| Key Aspects | Annual Recurring Revenue (ARR) | Committed Annual Recurring Revenue (CARR) |
| What does it represent? | Annual value of active subscriptions | Annual value of active subscriptions plus future commitments |
| Timeframe | Current 12-month period | Current and future 12-month periods |
| Scope | Snapshot of current financial health | Comprehensive view of current and future revenue |
| Applicability | Shorter contracts or month-to-month subscriptions | Longer contracts, upsells, and enterprise customers |
| Growth Insight | Current revenue only | Forecasts future growth |
| Decision-Making | Short-term decisions | Long-term planning and resource allocation |
| Investor Perspective | Indicator of current financial health | Predictor of future growth and potential |
| Calculation | MRR × 12 | ARR + Committed future revenue |
| Billing Cycle | Monthly, quarterly, or annual | Annual or multi-year contracts |
| Churn Impact | Directly impacted | Less affected due to long-term commitments |
| Upsell/Cross-sell | Not included | Includes anticipated revenue |
| Revenue Predictability | Current period | Future periods |
Now, let’s discuss each aspect in more depth to gain a clearer understanding of how ARR and CARR differ.
Timeframe
ARR focuses on the revenue generated within the current 12-month period. It gives you a snapshot of your business’s financial health based on the present situation.
In contrast, CARR considers the current 12-month period and future commitments extending beyond that timeframe, providing a more comprehensive view of your revenue potential.
Scope
ARR offers a snapshot of your business’s current financial health, allowing you to assess the stability of your revenue stream at a specific moment.
CARR, however, presents a more holistic view by encompassing not only your current revenue but also the anticipated growth from future commitments, giving you a clearer picture of your business’s overall revenue potential.
Applicability
ARR is particularly relevant for businesses with shorter contract terms or those that primarily deal with month-to-month subscriptions. These businesses often experience more frequent fluctuations in their customer base, making ARR a suitable metric to track.
On the other hand, CARR is especially valuable for businesses with longer contracts, significant upsell opportunities, and those targeting enterprise customers who tend to make longer-term commitments.
Growth Insight
While ARR provides valuable information about your current revenue, it doesn’t offer insights into future growth prospects. It focuses solely on the revenue generated within the present period.
Conversely, CARR helps you forecast growth by considering committed future revenue, allowing you to anticipate and plan for potential expansion and revenue increases.
Decision-Making
ARR is useful for making short-term decisions based on your current revenue situation. It helps you assess the immediate financial health of your business and make tactical adjustments accordingly.
CARR, on the other hand, enables more informed long-term planning and resource allocation. By considering future revenue commitments, you can strategically invest in growth initiatives, hiring, and product development with greater confidence.
Investor Perspective
From an investor’s standpoint, ARR serves as a good indicator of your business’s current financial health. It demonstrates the stability and reliability of your existing revenue stream.
However, CARR is often viewed as a stronger predictor of future growth and business potential. Investors are keen to understand not only your current revenue but also the committed future revenue that can drive long-term success.
Calculation
Calculating ARR is relatively straightforward. You simply multiply your Monthly Recurring Revenue (MRR) by 12 to determine the annual value of your active subscriptions.
CARR, on the other hand, involves a more comprehensive calculation. It starts with your ARR and then adds the total value of committed future revenue from contract renewals, upgrades, or expansions within the next 12 months.
Billing Cycle
ARR is typically associated with shorter billing cycles, such as monthly, quarterly, or annual subscriptions. It aligns with the recurring nature of these billing periods.
CARR, however, often involves annual or multi-year contracts, as it takes into account the long-term commitments made by customers.
Churn Impact
Churn, or the rate at which customers cancel their subscriptions, directly impacts ARR. As customers churn, ARR decreases, requiring businesses to continually acquire new customers to maintain or grow their revenue.
CARR, on the other hand, is less affected by short-term churn due to the presence of long-term commitments. While churn still matters, the impact is less immediate, providing more stability to the revenue stream.
Upsell/Cross-sell
ARR focuses solely on the revenue generated from active subscriptions and does not include potential upsell or cross-sell opportunities. It represents the current revenue without considering the additional revenue that could be generated from existing customers.
CARR, however, incorporates anticipated revenue from upsells and cross-sells, providing a more comprehensive view of your revenue potential.
Revenue Predictability
ARR offers predictability for the current period, as it represents the revenue you can expect based on your existing subscriptions. However, it doesn’t provide long-term predictability beyond the current timeframe.
CARR, on the other hand, enhances revenue predictability by considering future commitments. It allows you to forecast revenue for upcoming periods, giving you a clearer picture of your business’s financial trajectory.
By understanding the key differences between ARR and CARR, SaaS businesses can leverage these metrics effectively to gain valuable insights, make informed decisions, and drive sustainable growth.
While ARR provides a snapshot of your current financial health, CARR offers a more comprehensive view of your revenue potential. It takes into account both current and future commitments.
Metrics Related to Annual Recurring Revenue (ARR)
By monitoring key ARR-related metrics, SaaS businesses can identify trends, assess the efficiency of their customer acquisition efforts, and maintain the stability of their revenue stream.
Here are some essential metrics related to ARR that SaaS businesses should track:
| Metric | Expansion | Importance |
| MRR | Monthly recurring revenue | Tracks short-term revenue trends |
| CLV or LTV | Customer lifetime value | Insights into long-term customer value |
| CAC | Customer acquisition cost | Assesses acquisition efficiency |
| Churn Rate | Percentage of lost customers or revenue | Maintains ARR stability, identifies issues |
| Engagement Metrics | Product usage, feature adoption, support interactions | Indicates satisfaction and renewal likelihood |
Metrics Related to Committed Annual Recurring Revenue (CARR)
By monitoring CARR-related metrics, SaaS businesses can make informed decisions about resource allocation, sales strategies, and growth initiatives.
Here are some essential metrics related to CARR that SaaS businesses should track:
| Metric | Expansion | Importance |
| NRR | Net revenue retention | Measures customer satisfaction and upsell/cross-sell effectiveness |
| Expansion MRR | Additional revenue from existing customers | Understand existing customer growth potential |
| CMRR | Committed monthly recurring revenue | Granular view of anticipated revenue growth |
| Quota Attainment | Percentage of sales team hitting targets | Assesses sales strategy effectiveness |
| Sales Cycle Length | Time to close a deal | Identifies process improvement opportunities |
Tracking both ARR and CARR separately provides SaaS businesses with valuable insights into their current revenue and future revenue potential.
This helps them make smart choices about things like setting prices, hiring staff, keeping customers happy, and deciding which new markets to enter. By looking at both ARR and CARR, SaaS companies can create strategies that help them grow and succeed over the long term.
Tips to Improve Annual Recurring Revenue (ARR)
To effectively grow your Annual Recurring Revenue (ARR), consider implementing these strategic tips:
- Optimize your pricing strategy: Experiment with different pricing tiers and find the sweet spot that maximizes revenue without sacrificing customer acquisition.
- Improve lead generation: Refine your lead generation processes to attract more qualified prospects and convert them into paying customers.
- Enhance your onboarding process: Ensure that new customers are quickly and effectively onboarded to minimize early churn and maintain a stable revenue stream.
- Focus on customer retention: Invest in customer support and success initiatives to keep customers satisfied, reduce churn, and maintain a steady ARR.
- Continuously improve your product: Gather user feedback and iterate on your product to keep customers engaged and minimize churn, protecting your ARR.
- Analyze key metrics: Regularly track and analyze metrics such as MRR, customer acquisition cost (CAC), and customer lifetime value (CLV) to identify trends and optimize your strategies.
- Offer annual billing options: Encourage customers to opt for annual billing by offering discounts, which can help increase ARR and provide a more stable revenue stream.
- Implement a referral program: Incentivize current customers to refer new ones, helping you acquire more customers and increase ARR.
- Leverage upselling and cross-selling: Identify opportunities to upsell and cross-sell to existing customers, increasing their value and boosting ARR.
- Monitor and reduce revenue churn: Analyze the reasons behind revenue churn and take proactive steps to address them, such as improving customer support or offering more flexible pricing options.
Tips to Improve Committed Annual Recurring Revenue (CARR)
To effectively grow your Committed Annual Recurring Revenue (CARR), consider implementing these strategic tips:
- Encourage longer contract terms: Offer incentives for customers to sign longer contracts, such as discounts or additional features, to increase committed revenue.
- Implement a customer success program: Develop a proactive customer success strategy that focuses on helping customers achieve their goals and maximizes the likelihood of renewals and expansions.
- Identify upsell and cross-sell opportunities: Train your sales team to recognize and capitalize on opportunities to upsell and cross-sell to existing customers, increasing CARR.
- Develop a strategic product roadmap: Create a product roadmap that aligns with your customers’ evolving needs and delivers increasing value over time, encouraging renewals and expansions.
- Offer multi-year contracts: Introduce multi-year contract options with attractive discounts to encourage customers to commit to longer terms, increasing CARR.
- Focus on enterprise customers: Target enterprise-level customers who are more likely to sign longer contracts and have a higher potential for expansion, positively impacting CARR.
- Implement a customer feedback loop: Regularly gather customer feedback and use it to inform product development, customer success initiatives, and upsell/cross-sell strategies, ultimately improving CARR.
- Monitor and analyze expansion metrics: Track and analyze metrics like expansion MRR, net revenue retention (NRR), and CMRR to gauge the health and growth potential of your future revenue stream.
- Offer service level agreements (SLAs): Provide SLAs that guarantee a certain level of service or uptime, increasing customer confidence and willingness to commit to longer contracts.
- Educate customers on the value of long-term commitments: Communicate the benefits of longer contracts and multi-year commitments to customers, such as price protection, access to exclusive features, or dedicated support.
Frequently Asked Questions
What does it mean when my CARR decreases but my ARR stays the same?
A decrease in CARR while ARR remains constant suggests that future commitments, like new customers, renewals, or expansions, are declining, but your current revenue from active subscriptions hasn’t yet been affected. It’s a warning sign to assess customer satisfaction and future growth prospects.
Can CARR be negative?
No, CARR cannot be negative because it represents the total value of committed revenue from current customers for the future. However, if expected renewals or expansions don’t materialize, it might decrease, indicating potential issues with customer retention or satisfaction
How frequently should I calculate CARR for my SaaS business?
The frequency of calculating CARR depends on your company and business model and how quickly your sales cycle moves. Most businesses find it useful to calculate it quarterly to align with financial planning cycles and adjust strategies accordingly.
Is it necessary to track both ARR and CARR?
Yes, tracking both ARR and CARR provides a more complete picture of your business’s current financial health and its future revenue potential. ARR shows your present revenue, while CARR helps forecast your company expects future growth.
How do I improve my business’s CARR if it’s not meeting expectations?
To improve CARR, focus on several metrics: enhancing customer satisfaction, increasing renewal rates, and creating more upsell and cross-sell opportunities. Engaging with customers to understand their needs can also help tailor your offerings to encourage future commitments.
Does a change in CARR impact my company’s valuation?
Yes, a positive change in CARR can positively impact your company’s valuation by indicating potential for future revenue growth. Investors often look at CARR as a measure of a company’s growth prospects and the long-term sustainability of the subscription business.
How can I accurately forecast CARR in a highly competitive market?
Accurately forecasting CARR in a competitive market requires a deep understanding of market data sources, trends, customer behavior, and competitor strategies. Regularly reviewing and adjusting forecasts based on current data and market analysis can help maintain accuracy.
Are there any industries where CARR is more important than ARR?
CARR is particularly important in industries with longer sales cycles, high customer lifetime values, few costs, and significant upsell opportunities, such as enterprise software or B2B SaaS solutions. In these cases, future revenue commitments are critical for growth and stability.
Can customer feedback influence CARR?
Yes, customer feedback can significantly influence CARR. Positive feedback and high customer satisfaction can lead to increased renewals and expansions, boosting CARR. Conversely, negative feedback can decrease future revenue commitments, highlighting areas for improvement
Future-Proof Your Business with ARR and CARR
So, there you have it! ARR and CARR are two important pieces of the puzzle when it comes to building a thriving SaaS business.
By understanding the difference between these metrics and using them to your advantage, you’ll be well on your way to making smarter decisions. It will help keep your customers happy and, ultimately, achieve the growth and success you’ve been dreaming of.
It’s not always easy, but with the right tools and mindset, you’ve got this!
