What is ARR (Annual Recurring Revenue) ?

ARR represents the total annualized revenue generated from all subscriptions. It provides a clear shot of a company's ongoing revenue stream. ARR is a crucial metric for assessing a company's financial health and growth potential, as it indicates the revenue expected to be earned over the next year.

Use case to calculate ARR:

An email marketing tool charges a flat fee of €100 per month for platform access. The tool also charges €0.50 per email sent per month. To make it easier, let’s imagine they only have one client.

• If the business sends 10,000 emails in a given month, their total bill would be €5,100 (€100 flat fee + 10,000 emails sent x €0.50 per email).
• If they only send 5,000 emails in a given month, their total bill would be €2,600 (€100 flat fee + 5,000 emails sent x €0.50 per email).

To calculate the Annual Recurring Revenue (ARR) for the email marketing tool with the provided pricing structure, we need to consider the flat fee and the estimated number of emails sent per month.

Let's assume the business subscribes to the tool for a year.

• Flat fee per month: €100.
• Estimated number of emails sent per month: Let's say 10,000 emails.

To calculate the ARR:

• Multiply the flat fee by 12 (months): €100 x 12 = €1,200.
• Multiply the estimated number of emails sent per month by the price per email and by 12 (months): 10,000 emails x €0.50 x 12 = €6,000.

Add the results together:

• €1,200 (flat fee) + €6,000 (price per email) = €7,200

The ARR for this email marketing tool would be €7,200 per year.

What does $1 Million ARR mean?

When a company reports $1 million ARR, it means that if the current subscription revenue continues at the same rate for the next 12 months, the company is expected to generate $1 million in recurring revenue annually. This figure is important for investors and stakeholders as it indicates the scale and stability of the company's revenue stream.

What constitutes a good ARR?

A "good" Annual Recurring Revenue (ARR) can vary significantly based on several factors, including the industry, business model, company size, and growth stage. Here are some considerations:

Industry Standards:

• SaaS companies: For Software as a Service (SaaS) companies, benchmarks for a good ARR can differ widely, particularly between early-stage and established firms.
• Other industries: Different sectors may have unique expectations regarding ARR, influenced by their specific business models.

Company Stage:

• Startups: Early-stage startups may view a modest ARR as a positive indicator of potential growth.
• Growth stage: Companies that have moved beyond the startup phase often look for significant ARR to attract investment and demonstrate market traction.
• Mature companies: Established companies typically aim for a substantial ARR to reflect their market position and stability.

Growth Rate:

• A good ARR is also about the growth rate. Companies that consistently increase their ARR at a healthy rate are often seen as performing well, regardless of their current ARR level.

Profitability:

• While ARR is important, profitability and cash flow are also critical. A company with a high ARR but significant losses may not be sustainable in the long term.

Customer Retention:

• High customer retention rates can indicate a healthy ARR, as it shows that customers are satisfied and continue to pay for the service.

• SaaS companies: For Software as a Service (SaaS) companies, benchmarks for a good ARR can differ widely, particularly between early-stage and established firms.
• Other industries: Different sectors may have unique expectations regarding ARR, influenced by their specific business models.