We’re here to tell you that all revenue is good revenue…but there is in fact some revenue that’s far better than others – that’s where recurring revenue steps in. And if you’re running a SaaS company that’s looking to become profitable, recurring revenue is what you’re going to need. Before you nod your head and close the tab and say you understand that it’s just another metric you need to keep track of, we urge you to keep reading.
Any quick Google search will tell you that recurring revenue is one of those KEY ‘SaaS benchmark metrics’ that you need to keep close track of. But determining why and how to do so can be a daunting task.
So what is recurring revenue?
Recurring revenue is best understood as a revenue stream that’s both regular and fairly stable. Think of it as your most loyal customers that continue to pay you, and wouldn’t you do just about anything to ensure that those loyal customers stick around?
But there are a few different types of recurring revenue?
Monthly Recurring Revenue (MRR) is the metric for calculating your recurring revenue on a monthly basis. No, it doesn’t necessarily mean the customers on plans that are paying on a monthly basis, instead it’s one of the best ways to track your consistent revenue into trends over time.
You can calculate your MRR by multiplying the total number of paying customers by the average amount all of those customers are paying. Voila! SaaS metric achieved!
Annual Recurring Revenue or Annual Run Rate (ARR) is yet another metric for calculating your recurring revenue…except on an annual basis. It allows you to normalize and track any client subscriptions over a one-year period. Tracking your ARR is one of the best means of determining the overall health of any subscription-based services…like most SaaS companies.
You can calculate your ARR by only including fixed contract fees, ie: a subscription that’s been paid for for at least a year, and dividing those fees by the year. Don’t forget that you can’t include any one-time charges or subscriptions that are month-to-month in your ARR calculation.
Well, what’s the difference?
MRR is far more frequently used as a benchmark for SaaS companies, although it doesn’t make it more important than ARR. It’s certainly not necessary to utilize both when you’re defining some of your key metrics and it’s better to tailor those metrics to match your business model more so than anything else. ARR is far more relevant for those SaaS companies out there who do in fact sign agreements with customers for a year or more. Otherwise, MRR is the way to go!
Recurring revenue is one of those must track benchmark metrics for most SaaS firms and while both ARR and MRR are legitimate choices, at the end of the day, your best bet is picking one that best suits your business model and subscription packages.