Understanding the financial health of a SaaS company is paramount for founders aiming to scale and secure investment. Two critical metrics often discussed in this context are Committed Annual Recurring Revenue (CARR) and Annual Recurring Revenue (ARR). While both metrics provide valuable insights, they serve different purposes and offer unique perspectives on your company's revenue dynamics.
Understanding the Basics of ARR and CARR
What is CARR?
Committed Annual Recurring Revenue (CARR) factors in all committed contracts, including future upsells and expansions. This forward-looking metric provides a clearer picture of future revenue by considering customer commitments and anticipated contract changes. Essentially, CARR is a comprehensive indicator of potential revenue growth and business health.
What is ARR?
Annual Recurring Revenue (ARR) represents the current annual revenue generated from all active subscriptions. It excludes future upsells or contract changes, offering a snapshot of existing revenue streams. ARR is a straightforward metric, easy to calculate, and provides a clear view of the revenue being realized at the present moment.
Key Differences Between CARR and ARR
In short, the key difference between ARR and CARR lies in their temporal focus and scope. ARR focuses on the present, reflecting the current revenue generated from existing subscriptions, providing a snapshot of your current financial health. On the other hand, CARR is forward-looking, accounting for committed contracts and anticipated changes, giving a more predictive measure of your future revenue potential.
CARR: Forward-Looking and Future-Focused
- Predictive Nature: CARR is designed to project future revenue, making it invaluable for long-term financial planning and forecasting.
- Complex Calculation: Accurately calculating CARR requires a deep understanding of customer commitments, contract values, and anticipated upsells or expansions.
ARR: A Snapshot of Current Revenue
- Current Revenue: ARR provides an immediate account of the revenue being generated from active subscriptions.
- Simplicity: The calculation of ARR is straightforward, typically involving the sum of all recurring revenue streams.
- Short-Term View: While it offers a clear view of current financial health, ARR lacks the forward-looking perspective provided by CARR.
Step-by-Step Guide to Calculating ARR
- Identify Recurring Revenue Streams:
Determine all sources of recurring revenue, such as monthly or annual subscriptions, maintenance fees, or renewal contracts.
- Sum Up Revenues:
Add together the revenue from each of these recurring streams. For annualized metrics, ensure all monthly revenues are multiplied by twelve to provide a consistent annual figure.
- Account for Any Deductions:
Deduct any revenue churn or cancellations to get an accurate measure of recurring revenue.
Step-by-Step Guide to Calculating CARR
- Identify Customer Commitments:
Gather data on all committed contracts and subscriptions, including those that have yet to start but are secured.
- Consider Future Upsells and Expansions:
Factor in expected upsells, renewals, and expansions, based on historical data and growth trajectories.
- Adjust for Paydowns:
Subtract any anticipated downgrades or cancellations that might impact future revenue.
- Annualize the Data:
For accuracy, convert all projections to an annual basis. This ensures consistent measurement and comparability with ARR.
How Other KPIs Affect Your ARR and CARR
When managing a SaaS business, understanding how various Key Performance Indicators (KPIs) impact your ARR and CARR is crucial for getting a grasp on how to improve these metrics, but also see ahead when they will shift into a new direction. Here are some essential KPIs that can significantly influence these metrics:
Renewals and Renewal Rates
Renewals directly impact your CARR and ARR by ensuring that existing customers continue to purchase your product, maintaining a steady revenue stream. High renewal rates demonstrate customer satisfaction and value, which translates to predictable income and stability. By regularly tracking renewal rates, you can spot trends and address issues early, leading to improved customer retention and consistent growth in your CARR and ARR.
Customer Churn
Customer churn, the rate at which customers cancel their subscriptions, directly reduces both Annual Recurring Revenue (ARR) and Committed Annual Recurring Revenue (CARR). When customers leave, the recurring revenue they would have contributed is lost, diminishing your ARR. Similarly, a high churn rate decreases CARR by undermining the reliability of future revenue projections. Monitoring churn allows you to mitigate these losses by addressing issues like customer support, product features, or value proposition.
Plan Downgrades & Upgrades
Downgrades, where customers move to lower-tier plans, reduce revenue and impact Annual Recurring Revenue (ARR) and Contracted Annual Recurring Revenue (CARR). Monitoring downgrades helps identify gaps in offerings, allowing you to address them and maintain or boost ARR and CARR. Conversely, plan upgrades increase ARR and CARR by raising annual revenue from customers on higher-tier plans. Encouraging upgrades enhances these key revenue metrics by increasing the amount each customer pays annually.
