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What is Annual Run Rate?
Annual Run Rate (ARR) is the yearly version of MRR or Monthly Recurring Revenue. ARR helps project future revenue for the year based on your current monthly revenue. It assumes nothing changes in the year ahead – no churn, new customers, or expansion. While this might seem unrealistic in practice, ARR is a helpful tool to predict long-term growth and visualize the size of your business. If you hear someone say they have a $1M business, they are likely referring to having a $1M ARR. This means, at the current rate, they will bring in $1M in recurring revenue this year.
To calculate ARR, just annualize your MRR – multiply your current MRR by 12. If your MRR for last month was $100k, your ARR is currently $1.2M.
You can see example Annual Run Rate stats in the Baremetrics dashboard:
The Problem with Annual Run Rates
The biggest issue with calculating ARR by multiplying one month’s revenue is the volatility of month-to-month sales. If you’re a seasonal business, your ARR will look much better if calculated on a busy month’s MRR. This same issue happens if you sign a big customer for one month.
Some companies calculate ARR based on their quarterly MRR, i.e., multiplying the total recurring revenue from a quarter by four to smooth out variations from month to month. Instead of looking at just one number for ARR, it’s most important to look at the trend over time to see how fast a company is growing.
How to Calculate Annual Run Rate – The Nitty Gritty Details
First, a note on accrual accounting. Accrual accounting is an accounting method that recognizes economic events separately from when the cash is collected. It’s based on matching expenses and revenues in the month where they actually occur. For example, if you’ve signed an annual subscription, you’ll realize 1/12th of the contract value in each month of their subscription. You don’t account for the revenue until the service is provided. It provides a much more realistic picture of where a business stands monthly.
Annual Run Rate, like MRR, is calculated on earned revenue. If you sell an annual contract, you won’t include the full revenue amount in the month it was sold. You also won’t include one-off payments, because they aren’t expected recurring revenue.
Considerations for Churn and Upsells
When using ARR to forecast future revenue, it's important to consider factors like churn and upsells. High churn rates can significantly reduce your ARR over time, while successful upsell strategies can increase it.
Visual Representation
To better understand how ARR changes over time, consider tracking your MRR and visualizing trends using charts or graphs. This will help you see the impact of new customers, churn, and upsells on your ARR. Using Baremetrics for these insights can provide a comprehensive and accurate view of ARR and other revenue metrics. Get started today.
Comparison with Other Metrics
ARR is one of several metrics used to measure recurring revenue. Others include Total Contract Value (TCV) and Annual Contract Value (ACV). Understanding the differences between these metrics and when to use each can provide a more comprehensive view of your business's financial health. For instance, ARR is particularly useful for forecasting and understanding the sustainability of your recurring revenue, whereas TCV and ACV can help in evaluating the overall value and profitability of your customer contracts.
Annual Run Rate is just MRR multiplied
We won’t go into too much detail about ARR because we’ve written the book on MRR, and it’s really not much different!
Dive into our guide on MRR to learn how to grow ARR and what mistakes you might be making.
