Estimated reading time: 5 minutes
SaaS ARR growth, or Annual Recurring Revenue, is a crucial metric in the SaaS world. When on the steady rise, it signals both capital efficiency and a good product-market fit. It also helps you predict the future of a business (as well as anyone can make these kinds of predictions) and measure success.
Here is what you need to know about SaaS ARR and its growth.
What Is SaaS ARR?
In SaaS terms, ARR is the value of revenue you have earned in a year via subscriptions. It is usually used to denote the value of a business, as opposed to MRR (monthly recurring revenue), which is considered more of an operating value.
How To Calculate SaaS ARR?
The simplest way to calculate your ARR is by multiplying the number of paying users with your average revenue per user. This is not the only formula you can use, however, so you’ll want to check with everyone concerned that you are using the same numbers.
Note that this calculation omits all of your one-time payments and only takes into account people who have recurring subscriptions. Depending on what period of time you use for your “number of paying users” number, you may also omit people who only used your tool for a month or two.
You should also make a clear distinction between the money you’ve received and the money that is yet to land in your account. After all, subscriptions do get canceled, so you may end up projecting more than you’ve actually earned.
ARR should be used as a way to make decisions and predictions — it’s not a reliable accounting metric.
To calculate your ARR growth rate, divide the difference between your ARR at the end of the given period and the beginning of the same period by the ARR at the end. You will get a percentage as a result.
What Is A Good ARR For SaaS?
While benchmarks are helpful in determining your progress and how you compete with others, they should only ever be used in context. Think of them as you’d think of conversion rate benchmarks: they depend on time, industry, audience type, cost, etc. You can’t look at them in isolation.
Let’s look at a top-of-the-chart ARR for SaaS. Salesforce is now in the $24 billion+ category. They tripled their ARR two years in a row and then doubled their ARR another three years in a row. This resulted in their $1 billion valuation, but they have since been able to grow even further.
You can also take a look at this SaaS SEO case study by Smash Digital, who have increased their client’s revenue by 332% in the first year. This is not something you will see every day, nor is it something you should reasonably expect. As we’ve said before, you still need to bear in mind your industry, audience, and a whole host of other factors.
How To Improve Your ARR Growth
Now that you’re aware of the facts and figures, let’s take a look at some actionable ways to improve your ARR growth.
Understand All The Factors That Impact Revenues
For starters, you should understand everything there is to know about your customer’s journey, your churn rate, your competitors, your pricing model, your sales funnel, et cetera. This will help you determine which of them you can impact the most.
The more you learn about the way your target customers think and interact with your brand, why they need their subscriptions, and why they may decide to abandon your product, the quicker you can grow your ARR.
Understand What It Takes
Setting yourself a goal will help you map out the way to get there. For example, if you’re looking to hit a $1 million ARR, you will need to make ten $100.000 sales, or ten thousand $100 sales. This will help you grasp the scope of the task ahead.
It will also help you make the right marketing and sales choices. If you’re only going after ten huge contracts, you will need to invest a lot of time in each. If you are casting a wider net, you won’t be able to nurture each lead with the same level of care.
Reduce Customer Churn
The most important element of SaaS success is churn. Since your entire business is based on the subscription model, you want your users to keep coming back and keep paying that monthly fee. Ideally, you want them to pay for a yearly subscription.
The more you’re able to reduce your customer churn, the higher your ARR will be. The following are the two most effective ways to do it:
- Nurture your fresh leads with onboarding emails and quality content that will help them decide to stay in the long run.
- Offer retention programs.
This can include discounts, a gamification element, or anything that will reward people for staying and subscribing for longer. Most SaaS companies offer several months’ value when choosing a yearly subscription.
Rethink Your Pricing
You should also rethink your pricing strategy. First, raise your prices every couple of years to stay ahead of inflation and ensure you cover all operating costs. More importantly, consider the needs of your customers and what they would like to use your solution for.
If they are only interested in one of your features, don’t make them pay for all of them. If they want more seats at the table, don’t make them buy an entire subscription for everyone. The more flexible you are and the more you show you care about your users, the likelier they will be to sign up for a year.
Calculating your ARR can give you a great look into the state of your business. However, don’t take these numbers as gospel. You can do a lot to change them, and they are not set in stone. They don’t foreshadow success or doom — they merely help you gauge how your current efforts are paying off.
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