Recurring income is a fundamental aspect for the consolidation of any type of business, whether within a traditional or digital framework. These assume a continuous flow of profits and offer a channel to estimate the development of the company or brand during different periods of time. In order to calculate this recurring income there are two basic metrics, the and the ARR.
The MRR, o Monthly Recurring Revenue, refer to the ongoing monthly income received by a business. On the other hand, ARR, o Annual Recurring Revenue, offer the same information but on an annual basis. Today we want to talk about this second metric, the ARRs and the importance they present for eCommerces.
ARR, the key projection for the future of your business
As we mentioned before, ARRs are a set of metrics that allow evaluating the amount of recurring revenue to expect, based on annual subscriptions. That is, they offer a perspective on the growth of the business as well as an approach for future expectations about it. They also offer the possibility of establishing more realistic strategies for the recovery or growth of a company based on its general state.
In recent years the subscription services they have had a wide proliferation, all thanks to the impulse of the consumption of digital content. For this reason, the knowledge offered by ARRs takes on renewed importance, offering a more complete view of this business model. Likewise, with a focus on this type of income, it is possible to generate greater growth for the company or brand.
In any company, be it an eCommerce or a service platform, ongoing income They are the ones who keep your business afloat. So that, optimize the means of entry of this income It is a key aspect in the growth and consolidation of a company. In the case of a store, it refers to those micropurchases regular and recurring customers with their loyalty programs, which can be optimized by offering specific benefits or offers, which allow attracting and retaining new customers.
On the other hand, in a service platform like Netflix either Disney+these revenues derive directly from the monthly or yearly subscriptions. In this case, a possible way to optimize these profits, even if it is counterproductive, is to reduce costs for customers. For example, although Netflix remains the leader in the entertainment sector, it has suffered a considerable decrease in the growth of its subscribers due to its prices.
How to calculate ARRs
Already having an idea of the importance and use that we can give to this particular metric, it is time to know how to calculate it. There are two basic shapes To calculate this recurring income, which will depend on the business model with which the company has.
In a first case, we can calculate annual recurring revenue based on MRRjust multiplying this figure by 12. This form of calculation is intended for business models that base their pricing strategy on recurring monthly revenue, such as subscriptions. As we can see, it is a basic calculation that offers us a very general vision of the income that can be expected from the business in an annual estimate.
However, for more complex business models There is a second method of calculating annual recurring revenue. For this calculation three different factors are taken into account: new subscriptions, additional income and lost subscriptions. And its calculation is proposed as follows:
- ARR = (annual subscriptions + additional income) – subscriptions lost
In this equation the annual subscriptions They refer to the total income received by the company at the rate of recurring subscriptions or service fees throughout the year. The additional income On the other hand, they refer to additional accessories, updates or extra benefits for which consumers must pay an additional cost. As an example we can take the premieres of movies within the Disney + platform or the rental on Amazon Prime, which present expenses apart from the subscription of the service.
Finally the missed subscriptions as we can infer, it comprises the total money lost regarding the cancellation of subscriptions and the abandonment of users to the platform.
Other factors to take into account
In addition to these factors that we have mentioned for both calculations, it is important to take into account the following: new customer revenue Y product upgrades and downgrades. Any perceived changes in these factors may directly affect the ARR calculations, as the estimated values would be subject to change as a result of them.
That said, we can see how the information that ARRs can offer us is not only crucial for understanding the development of a business, but also offers a way to build more assertive strategies when it comes to attracting and retaining customers, or simply seeking to generate an impact on the public.
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