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How to (Properly) Calculate ARR and MRR for Your SaaS Business

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For a subscription business, like your SaaS company, MRR is perhaps the single most important performance metric around. Trouble is, it isn’t always as easy to determine, track and predict your MRR as it first appears.

Today, I’m taking a close look at how to (properly) calculate MRR and ARR.

The Importance of MRR

Most B2B SaaS businesses work on a monthly subscription model: customers pay a fixed fee, each month, and for as long as they stay a customer, you have a predictable revenue source.

The recurring nature of this payment makes it (relatively) easy to track and forecast revenue, in a way that other business models would struggle to do. That’s where MRR comes in: we can work out the amount of predictable revenue generated by our customers each month, known as Monthly Recurring Revenue.

If we have a good handle on customer acquisition and churn rates, we can even use that to extrapolate to the future, and predict future MRR.

HOW TO CALCULATE MRR

The basic formula for MRR is pretty simple: for any given month (period t), simply sum up the recurring revenue generated by that month’s customers to arrive at your MRR figure.

MRRtΣ Recurring Revenuet

In the example below, we have a monthly subscription cost of $200, and 2 customers in January. In February, we gain another customer, and MRR increases as a result:

January: 200 + 200 = $400 MRR

February: 200 + 200 + 200 = $600 MRR

March: 200 + 200 + 200 = $600 MRR

HOW TO CALCULATE ARR

Chances are when you see reference to MRR, ARR isn’t far behind. That’s because these metrics go hand-in-hand like fine wine and… well, annualised fine wine.

I’ve seen ARR referred to as both Annual Recurring Revenue and Annualized Run Rate, but the core calculation is the same either way.

Where MRR measures the recurring revenue generated each month, ARR measures the recurring revenue you’d generate over the course of a year. For forecasting purposes, ARR is used to predict annual recurring revenue for the coming 12 months, assuming no changes to your customer base.

As a result, the formula is pretty straight forward:

ARR = MRR * 12

If you’re confused about when to use ARR instead of MRR, don’t worry: ARR is typically the reserve of enterprise SaaS companies, dealing primarily in annual contracts. If monthly subscriptions make up the bulk of your recurring revenue, you’ll be better served by using MRR.

“…most enterprise SaaS companies should use annual recurring revenue (ARR), not monthly recurring revenue (MRR), because most enterprise companies are doing annual, not monthly, contracts…”Dave Kellog

How to Get MRR Right

Though the basic formula for MRR is extremely simple, many SaaS businesses include (or exclude) unnecessary data sources, and confuse their MRR calculations as a result.

Things to include in your MRR calculation:

  • All recurring revenue from customers. This includes monthly subscription fees, and any additional recurring charges for extra users, seats, etc.
  • Upgrades and downgrades. It’s important to track any successful upselling, and any customers that downgrade to a lower-priced package.
  • All lost recurring revenue. Customers churn, and this reduction in MRR needs to be accounted for.
  • Discounts. If your customer is on a $200/month package, but pays a discounted monthly fee of $150, their MRR contribution is $150, not $200.

Things to exclude:

  • Recurring costs. MRR isn’t a measure of profitability, just revenue. We’re trying to gauge trends in recurring revenue generation, and adding costs to this will only confuse matters.
  • Bookings. This a common mistake, and warrants exploring in a little more depth. 

The Confusion Between Bookings and MRR

MRR is relatively easy to calculate if all of your revenue comes from monthly subscriptions. But what happens if your customers want to pay for a year in advance? 

In the example below, we have 3 customers, and a monthly charge of $200. While 2 of the customers pay monthly, the third pays for the whole year in advance.

If we treat the advance as MRR, our monthly reporting might look something like this:

January: 200 + 200 + 2400 = $2800 MRR

February: 200 + 200 + 0 = $400 MRR

March: 200 + 200 + 0 = $400 MRR

However that annual payment shouldn’t be counted as MRR: it isn’t paid monthly, and it isn’t recurring.

The payment should instead be counted towards your Bookings figure: the total value of all new deals obtained over a particular time period, with no distinction between up-front and recurring payments.

Your Bookings figure is great for calculating cashflow, but MRR is a measure of recurring revenue generation. So to turn a booking into MRR, it needs to be amortized, and spread out over the year (in other words turned into a monthly, recurring payment):

January: 200 + 200 + (2400/12) = $600 MRR

February: 200 + 200 + (2400/12) = $600 MRR

March: 200 + 200 + (2400/12) = $600 MRR

If you’re regularly on the receiving end of both monthly payments and annual payments, this can quickly confuse your MRR, and obscure real trends in your recurring revenue. And even if it sounds like an easy distinction to make, bookings/MRR confusion affects even the biggest and best SaaS businesses around.

PlatoAi. Web3 Reimagined. Data Intelligence Amplified.
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Source: https://www.cobloom.com/blog/how-to-calculate-saas-arr-mrr

Fintech

State Street sees CRD tech acquisition pay off with 22% YOY revenue growth

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State Street saw 22% year-over-year growth in revenue from deployments of Charles River Development (CRD), a front-office software firm it acquired in 2018. The revenue growth was primarily related to professional services and its software-as-a-service (SaaS) offering, which together grew 18% YoY, Chief Financial Officer Eric Aboaf said during today’s third-quarter earnings call. The technology […]

PlatoAi. Web3 Reimagined. Data Intelligence Amplified.
Click here to access.

Source: https://bankautomationnews.com/allposts/business-banking/state-street-sees-crd-tech-acquisition-pay-off-with-22-yoy-revenue-growth/

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SaaS

6 Product Led Growth Sessions From SaaStr Annual 2021

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As OpenView and many others have documented, Product Led Growth (“PLG”) is one of the dominant themes of the SaaS marketplace today.

Unsurprisingly, Product Led Growth was one of the most popular discussion topics at SaaStr Annual 2021.

If you missed out on attending SaaStr Annual 2021 – where our outdoor format earned an analogy to the “Coachella of SaaS” – or just want to understand PLG better, here are 6 sessions to study:

PLG SaaStr Session #1: “Mastermind Masterclass: Beyond Product-led Growth: 7 Lessons Learned in Product-Led Scaling with Dropbox’s GM”

Presented By: Rachel Wolan – GM & VP – Dropbox – @rachelwolan

Video: HERE

Intriguing Session Slides:

PLG SaaStr Session #2: “From the Desk of ClickUp’s VP of Operations: Hold Onto Your SaaS: How ClickUp Rocketed from $4M to $70M ARR in Two Years with Product-Led Growth”

Presented By: Aaron Cort – VP of Operations – ClickUp

Video: HERE

Intriguing Session Slides:

PLG SaaStr Session #3: “Building a $5.6B Company with a Product-led Flywheel with Postman’s CEO”

Presented By: Abhinav Asthana – Founder and CEO – Postman – @a85

Video: HERE

Intriguing Session Slides:

PLG SaaStr Session #4: “Mastermind Masterclass: How Community-Led Growth Drives Product-Led Growth with Notion’s CRO”

Presented By: Olivia Nottebohm – Chief Revenue Officer – Notion – @ONottebohm

Video: HERE

Intriguing Session Slides:

PLG SaaStr Session #5: “Mastermind Masterclass: How Community-Led Growth Drives Product-Led Growth with Notion’s CRO”

Presented By: 
Mark Jung – VP Marketing- Dooly
Rebecca Kline – SVP Marketing – Loom 
Garrett  Scott – Head of Marketing, Growth,  Demand Gen – Calendly

Video: HERE

Intriguing Session Slide – this gives you a sense of the creative + interactive format:

Last but not least:

PLG SaaStr Session #6: “How to Build a Product-led Sales Engine Through Hypergrowth with Dooly’s VP of Revenue”

Presented By: Michelle Pietsch – VP of Revenue – Dooly

Video With Slides: HERE

In the comments below, let us know what Product Led Growth experts you want to speak at SaaStr? 

Published on October 8, 2021

PlatoAi. Web3 Reimagined. Data Intelligence Amplified.
Click here to access.

Source: https://www.saastr.com/6-product-led-growth-sessions-from-saastr-annual-2021/

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SaaS

How To Keep Your Customers For a Decade. Or Longer.

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Salesforce likes to talk about “Customers for Life”, and while that’s sort of catchy, it’s a little hard to grok what it really means.

It finally sunk in for me a bit the other day.  At Adobe Sign, there’s a large group of well-known customers that I closed, Back in The Day … that now have been customers for 15 years.  A decade and a half!

We launched on January 1, 2006 on TechCrunch, and while we closed some good names that first year (Dell, BT, Qualcomm, GE, Comcast, etc.), it wasn’t until later on in 2007 that we had enough revenue to create a large enough group of customers to go on a 10 Year Journey with. And the law of Power Laws and Large Numbers means that, obviously, Adobe has closed far more customers under its watch than I ever did.  The business has grown 15x since then.

Still, I’ve learned a lot seeing case studies go up over the years of customers I closed … that 15 years on … are still customers.

Some take-aways:

  • If You Truly Have Net Negative Churn and High NPS — Then Almost Any Reasonable CAC Makes Sense.  If It Lets You Acquire 15+ Year Customers.  I know some VCs will take shots at this statement, and I mean it more as a construct than a reality.  But if your customers last 10 years, and buy more from you each year … I.e. if a $100k ACV deal you close today, over 10 years, ends up being $2m in total revenue … what can you spend to acquire that customer?  A lot.  Really, quite a lot.  A  lot more than say 20% of first year ACV.  But you have to have insane NPS/CSAT + truly high net negative churn (120%-140%) for this math to really work.  If your customers don’t love you and buy more, your CAC has to be very low.  Be cautious if your customers don’t yet truly love you.  But if you’ve got this winning formula with bigger customers especially — be confident.  Run the tables here.
  • Rip-and-Replace Deals Are Worth It.  As you scale, your competitors will try to do Rip-and-Replace deals.  As frustrating as it can be to deal with those, and maybe even unsavory to do them yourself … it’s worth it.  If the customer lasts 10 years.  You can even give away the first 18 months of a Rip-and-Replace if the customer will last 10 years.  These deals make no sense if you aren’t going long.  But if you are … they are worth it.
  • You Can Get Them Back.  Not Always.  But Often Enough to Go Long and Invest There.  Nothing is more painful than losing a big customer.  Most you may not get back, and even if you do, it may take years.  But if you are thinking in terms of Decade Long Relationships … put sales and even customer success back on lost customers.  They may boomerang back.  It happened to me.  Just not often enough in the first 5 years for me to fully understand it.
  • Put Lots of Coverage on Lost Deals, Too.  Similar to the prior point, but different.  Lost a deal to a competitor?  Well, over the next 10 years, your competitor may stumble.  You may have a chance again.  Don’t view them as Gone Forever.  View them as a Special Prospect in Salesforce, instead.  Never stop trying to win them back.  Invite them to your customer conference.  Don’t send them spammy SDR emails.  But keep them close.  Keep them part of the extended family.
  • Get on a Jet (Now That We Can Again).  I never lost a customer I visited.  More on that here.  I know you’re tired.  I know you have no time.  But if you are going long, there’s no better use of your time than visiting customers.  Not prospects.  But customers.  I ask almost every public and unicorn CEO at the SaaStr Annual how much time they spend with customers.  It’s almost always more than you’d expect.  It’s often more than 50% of their time.
  • Slow Down and Get It Right.  Get your VPs of Sales, Customer Success, Product and Engineering right.  They’re key to this 10 Year Journey.   Even if it takes an extra month or two to get a great one.
  • Overdeliver.  Your customers will basically all stay if you overdeliver.  It doesn’t even matter that much if your competitor has caught up, or even in many cases, passed you in some areas.  Customers invest in not just products, but relationships.  They know they are on a 5-10 year journey too.  Overdeliver vs. their expectations.  Focus on that more than the competitive noise per se.   Force your team to launch at least one “Surprise and Delight” feature each quarter than every customer can at least appreciate, even if they don’t use it immediately.
  • Enterprise deals are nothing like SMB deals, most especially over the long term.  We all know this, but over time the difference becomes even more stark.  Small companies churn at a much higher rate, and it’s much harder to get true net negative churn.  If you compare them over 10 year lifetimes, you’ll see you should probably invest much more in the bigger customers.  And make sure your VP DNA matches your core long-term customers.
  • Truly happy customers are magical.  Challenge yourself.  Measure NPS.  Do a customer conference.  Get the feedback.  Whatever you do — don’t assume your customers are happy because they don’t churn.  That’s rookie error #1.
  • Invest — at least in your bigger customers — as if they are worth 10x what they are worth today.  And make sure you measure your customers by potential value over the next ten years.  If you have Google for $99/month, that’s not a real enterprise deal.  But if you have Google for $250k a year — how much can they be worth over 10 years?  Maybe $5,000,000.  Invest like that.
  • Going Long is Incredibly Empowering.  I’d like to say I was always committed for 10+ years, but that’s not exactly the case.  If it had been, I would have approached all our customer relationships differently.  I loved our customers.  I just didn’t really think of them as ten year relationships.  My mistake.
  • Forever Customers build Forever Companies. You know this. But it takes time to see it and feel it. This is the one thing you can really bank on in SaaS and with recurring revenue.
  • Get it Right, Really Right — And You’ll be Unstoppable.  At least for Decades.  SAP, Oracle, Concur, Cvent, Successfactors … you can take some shots at these oldie products, but these brands endure for decades.  Even post-acquisition.  Salesforce is in  its third decade, and still growing 20%+ at $20 billion+ in ARR.  I’ve been a Decade+ Customer of Salesforce myself now.  Invest in your team, your product, your customers for life.  For decades.  It will be hard to do until you come up on $5m-$10m ARR or so, unless you are pretty well funded.  There won’t be enough people, team or resources.  But after that, at least.  Invest for decades to come.  It won’t seem so crazy then.

10+ Year Customers.  It was always an abstract concept to me.  It shouldn’t have been.

SaaS: Maybe Plan for 30+ Years as a Founder

(note:  an update of a classic SaaStr post)

Published on October 7, 2021

PlatoAi. Web3 Reimagined. Data Intelligence Amplified.
Click here to access.

Source: https://www.saastr.com/the-10-year-customer/

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SaaS

Why a Great Rep Can Close 9x More Than a Poor Rep, and Even 2.5x More Than a Good Rep

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We’ve talked a lot on SaaStr about great sales professionals, on driving up Revenue Per Lead, on not capping sales comp systems, and on why you need to manage out your worst reps (because leads are precious).

What we haven’t done yet is put it all together in a simple, quantitative spreadsheet.  Let’s do that — it is eye-opening:

This is what happens in the real world.  A great rep often literally closes 9x more than a poor rep.  And even 2.5x+ that of a decent, mid-pack rep.  With the exact same number — and same quality — of leads.

But how?  How does this happen?  It’s several factors compounding:

  • First, the best reps close more seats / more revenue per deal.  They are better at mapping out business processes, at discovering how many seats, units, whatever there is to sell … and they just sell more.  Like clockwork. The great reps truly and quickly and effectively learn how much each prospect really can buy — and they get that much.  Without fear, and without ripping the customer off.
  • Second, the best reps generally discount less.  Not always, but usually.  The best reps get very confident in the value proposition.  And poor reps and even mediocre reps fall back on the only arrow in their quiver — A Discount!!  But discounting a product a prospect doesn’t really want doesn’t really work.  In fact, it can harm close rates.
  • Finally, the best reps close faster and close more They don’t mess around, or play games.  They know time is the enemy of deals.  They get very good at key objections.  The know the product and the pitch and the value prop cold.  They build strong relationships with prospects, and add enough value they can ask for a favor back — the sale.  They close better and faster.

These 3 factors together have a compounding effect, which is key.  You can still be a good rep and just be good at some of these 3 factors.   If you are great at all 3, then magic happens.

The top reps close larger deals than a mid-pack rep, discount just a bit less, and close faster … and the three factors together pull them far, far ahead of the pack.  For the same amount of effort (and often, even less total time).

This is also why you have to fire the poor reps fast.  You need to see if they can deliver.  But if they can’t, they don’t just miss quota.  They leave all the money in the spreadsheet above on the table.

Put differently, in the above scenario, the above Poor Rep left $160,000 on the table ($189,000-$20,790). In just one quarterRevenue that was there for the taking.  The leads were there.  Waiting to be sold to.

Route those leads to someone better, and magic will happen.  Fast.

(note: an updated SaaStr Classic post)

Published on October 5, 2021

PlatoAi. Web3 Reimagined. Data Intelligence Amplified.
Click here to access.

Source: https://www.saastr.com/why-a-great-rep-can-close-9x-of-a-poor-rep-and-even-2-5x-more-than-a-good-rep/

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