Monthly Recurring Revenue vs. Annual Recurring Revenue

Certainty is one of the desired business wishes. Indeed, knowing approximately how much money you’re going to make in each of the following months is relieving.

However, this is the most difficult part of business management, because cash flow fluctuates, and consumers come and go.

Still, it’s possible to make a rough prediction on the potential income in the time ahead if you rely on recurring revenue.

This article explains what recurring revenue is and highlights the main difference between monthly recurring revenue vs. annual recurring revenue.

Recurring Revenue Defined

The term recurring revenue refers to any regular revenue generated within the same periods over a longer time. Your business keeps receiving the assets from the consumer until they cancel their subscription or payment plan.

Whether or not a business will be able to embrace recurring revenue depends on the industry itself and the type of products or services it sells.

For instance, a company selling caterpillars most probably won’t sell one machine to the same consumer every single month. However, a subscription-based business that streams TV shows, movies, or music is more likely to base its operations on recurring revenue.

Monthly Recurring Revenue

Monthly recurring revenue (MRR) indicates the total revenue from subscriptions on a monthly basis.

You can calculate your MRR if you deduct the number of canceled subscriptions from all the new subscriptions and upgrades.

Calculating and tracking MRR helps business owners get a better insight into the efficiency of their subscription plans, tiers, and pricing.

Knowing how and why customers subscribe and unsubscribe from your services is invaluable in making new business decisions and ensuring proper cash flow.

How to Calculate MRR

Let’s say you offer your subscription in three tiers. The first tier is Basic, which costs $10 per month, and 30 people subscribed to that tier last month. Hence, the MRR for that tier is $300. However, the following month you lose 3 subscribers but get 6 new consumers, which amounts to a total of 33 subscribers the following month. For that particular month, the MRR for the Basic tier would be $330.

The same pattern goes for every tier, and then you simply add together the sums of each tier every month.

Annual Recurring Revenue

Annual recurring revenue is the recurring revenue from subscribed users calculated annually. The formula for calculating ARR is, as follows:

ARR = Total Number of Annual Subscriptions + Upgrades Revenue – Canceled Subscriptions

When calculating ARR, it’s important to calculate yearly revenue by tiers and then sum up the total revenue.

For instance, if tier Basic costs $100 and brings 100 subscribers, the ARR for that tier is $10000. The same goes for each tier you offer in your plans.

Just like MRR is important for monthly business decisions, ARR matters on a yearly basis. After one year, you’ll have a better understanding of what your customers have liked most throughout the year in question and what aspects should be changed.

How to Boost MRR and ARR?

As regular, stable revenue is the main guarantee that your business will grow, knowing how to boost MRR and ARR makes all the difference between successful and failed businesses.

Let’s dive into several practical tips that will increase your MRR and ARR:

• Upselling, cross-selling, extra benefits. You don’t have to win the Nobel Prize in economic sciences to realize that an existing customer is more valuable than a new one. This is even more obvious is the consumer is a subscriber who makes recurring payments to your business. Hence, if you want to boost your MRR and ARR, immerse your loyal customers in ample but reasonable offers. Send out emails regularly with upselling, cross-selling, and additional offers. Every customer who upgrades to a higher tier is valuable for enhanced revenue.
• Test the pricing tiers. With all its calculations, data, and analytics, business is sometimes a mere game of trial and error. When setting your pricing tiers, check out the competition to see their prices. The logical thing to do is offer prices a few percent lower, especially if you’re a new player, but don’t go too low. After all, test a few pricing tiers on a controlled group of users and ask for feedback to understand whether they’ve received the value they expected for the given prices.
• Provide utmost quality. Building a trust-based relationship means a world in business. That’s why some brands with long traditions don’t have issues with customer retention; unless they relax too much and start launching faulty products. Don’t be that business but keep improving the quality of your products and services. A streaming service provider? Search for the best hosting providers to avoid downtime. Otherwise, you’ll face a lot of canceled subscriptions, refund requests, and filed chargebacks.

CheckoutGate Intel: CheckoutGate has the necessary knowledge and tradition in handling online payments for high-risk merchants (which are basically most subscription-based businesses), from risk mitigation and fraud prevention to billing counseling.

What’s Not Part of MRR and ARR?

Some business owners miscalculate their MRR and ARR because they fail to include some features or add up unnecessary ones.

For starters, be aware that one-time payments should be included neither in the MRR nor ARR, simply because they’re not recurring payments.

The same goes for trial periods. Even if the consumer leaves their payment data, which is a common case even for trial periods because it’s expected they’d keep using the service, don’t calculate them in MRR until the first payment has been actually made.

Also, if you offer discounts on some subscription tiers, add them to the MRR calculation and, eventually, the ARR summary. Create a separate section for each discount, per pricing tier.

Finally, you must include the payment processing, banking, and any other fees in your ARR and MRR calculations. They’re an integral part of each installment, so don’t forget to add them.

Conclusion

Even if you’ve never run a business, but are preparing to launch one, bear in mind that adequate and smooth cash flow is essential. If you compare it to a household, you’ll understand that it’s impossible to run a business without assets. Think about all those moments when you maybe didn’t know how to make ends meet. Now imagine a business owner who doesn’t have enough funds for the paychecks and overheads at the end of the month.

That’s why recurring payments, both monthly and annual, are invaluable in keeping a business financially healthy. The tips above should help you understand how to calculate them and why they matter in business management.

For more information about smooth payment services, contact us and have your merchant account opened in the shortest time possible: https://acceptpaymentsnow.typeform.com/to/NbSkFD7R.