Cars or pirates: The true fight of the century.
Hold on.
Is the CARR vs ARR debate confusing you?
Both these metrics are considered key indicators of your company’s growth and financial health, making it hard to choose between the two.
But what exactly do these acronyms mean, and which one should you focus on?
In this article, we’ll break down the differences between CARR and ARR, how to calculate them, considerations to keep in mind, benchmarks, and why the CARR metric matters more for a growing SaaS business.
We’ll also cover when a firm should use CARR, what steps they could take to improve the metric, and a few related metrics.
Further Reading
- Explore our detailed guide to Rule of 40 in SaaS (+ 3 reasons you should be using it).
- Check out 6 critical SaaS Activation Metrics that your team should care about.
- Eager to track customer satisfaction levels? Read our step-by-step guide to creating a powerful SaaS NPS survey.
This Article Contains
- CARR vs ARR: Key Differences
- How to Calculate ARR and CARR?
- Why Does the CARR Metric Matter?
- Who Should Be Using CARR?
- 3 Surefire to Improve Your CARR
- 5 CARR-Related Metrics You Should Know About
Suit up and get ready to learn the ins and outs of these crucial SaaS metrics!
CARR vs ARR: Key Differences
ARR, or Annual Recurring Revenue, is the total revenue you can expect to generate every year from your yearly subscriptions. However, ARR only considers your revenue stream from active subscriptions or live contracts.
In other words, it’s the money you earn from the loyal customers who keep loving you year after year.
On the other hand, CARR (Committed or Contracted Annual Recurring Revenue) accounts for new bookings and churn (cancellations) in addition to your ARR.
Moreover, ARR includes recurring revenue once the customer’s yearly contract actually begins, while CARR includes recurring revenue once the deal is sealed (closed/won date).
This means your CARR can tell you how much revenue you’re guaranteed to earn based on the signed contracts, even if there’s a delay in the contract going live.
Now let’s get to the math. 🧮
Covered next are the formulas to calculate your ARR and CARR.
How do you Calculate ARR and CARR?
Let’s start with the ARR calculation first:
1. ARR Calculation
As we mentioned earlier, ARR is the total revenue earned from live subscriptions.
The ARR formula is as follows:
ARR = (Total contract value / Duration of contract in years) * Number of customers
Let’s say, 100 customers sign up for your product’s 3 year subscription with a total contract value of $30,000.
Your ARR calculation is: (30,000/3) x 100 = $1,000,000
Simple, right?
But there’s a catch.
To keep the ARR formula error-free, your ARR should also include:
- Expansion revenue: An existing customer upgrading to a higher value plan.
- Recurring invoices: All recurring fees and subscription revenue, such as charges per seat or user.
Likewise, your ARR should exclude non-recurring items, such as:
- Set-up fees.
- Any one-time fees.
- Non-recurring add-ons.
Note: Annual revenue can also work well with GAAP revenue recognition (Generally Accepted Accounting Principles) if your subscriptions are in multi-year or annual intervals.
Once you have your ARR, you can move on to your contracted annual recurring revenue.
2. CARR Calculation
The basic CARR formula is as follows:
CARR = ARR + New Bookings – Churn
But if you want a more nuanced look into your CARR you can break down the formula further to include any contracted upsells and downgrades.
The CARR formula, in this case, will be:
CARR = ARR + New Bookings + New Upsell Bookings – Downgrade Bookings – Churn
Now if your inner Micheal Scott says…
Here’s a scenario to explain this formula.
Let’s say your annual recurring revenue for 2022 was $1,000,000. Other financial elements included:
- New bookings for 2022: $250,000
- New upsell bookings for 2022: $100,000
- Downgrade bookings for 2022: $50,000
- Churn (cancellations) for 2022: $50,000
Your CARR for 2022 will be = $1,000,000 + $250,000 + $100,000 – $50,000 – $50,000
= $1,350,000 – $100,000
= $1,250,000
Now while exploring CARR, you may have also come across the term CMRR.
Before you go…
Relax!
Because it isn’t too different from CARR.
Here’s the deal:
CMRR is the monthly revenue version of CARR and stands for Contracted Monthly Recurring Revenue or Committed Monthly Recurring Revenue.
Your contracted monthly recurring revenue includes recurring revenue from monthly subscriptions, aka the MRR (Monthly Recurring Revenue), your future bookings, and churn on a monthly basis.
The formula for committed monthly recurring revenue is as follows:
CMRR = MRR+New Bookings+New Monthly Upsells- Monthly Downgrades- Monthly Churn
So, how do you use these SaaS metrics?
While you can compare your calculations to industry benchmarks (covered later), it’s better to assess the change in your CARR and ARR.
A consistent rise in these metrics is good news. The greater the growth rate, the better, as this indicates strong revenue growth and low churn.
That said, you should also consider tracking recurring revenue with other metrics, like customer acquisition cost, time to go live, and annual contract value, to get a holistic view of your business’s financial health.
By looking at these metrics collectively, you can better assess the impact of changes in your recurring revenue stream on your overall business performance.
Now, you must have realized that CARR and CMRR can be slightly more complex than ARR and MRR. So there are certain parameters you should keep in mind to get an accurate committed recurring revenue.
Considerations for Calculating CARR
Here are a few points to note when calculating your committed ARR:
- Difference between bookings and CARR: Bookings usually don’t have a common definition. They may include non-recurring earnings like one-time payments or payments for any professional service. Whereas CARR is always recurring in nature.
A.K.A, don’t jump the gun.
That brings us to the next question…
How Often Should You Calculate CARR and ARR?
You can calculate both ARR and CARR on a month on month basis to monitor your growth trajectory and quickly make strategic decisions based on revenue trends.
However, monthly fluctuations in CARR can be influenced by various factors, such as seasonal trends, promotions, or changes in customer behavior. So, analyzing CARR over a longer period, such as a quarter or a year, can give a more accurate picture of your business’s revenue growth.
So what are the ideal ARR and CARR figures you should be aiming for?
ARR and CARR Benchmarks
A good CARR depends on the specific business and stage of growth. Rather than comparing it to an absolute value, you should aim to assess the change in your CARR over similar time frames.
The same holds true for ARR. But, if you still wish to put a number to it, here are some ARR growth rate benchmarks based on the revenue size:
- Less than $1M: 100% growth rate
- $1M-$2.5M: 79% growth rate
- $2.5-$10M: 50% growth rate
- $10-$20M: 72% growth rate
- More than $50M: 30% growth rate
(Source: OpenView’s 2022 SaaS Benchmarks Report)
Now you know the do’s and don’ts of calculating the contracted annual recurring revenue.
Super!
Let’s also look at how your SaaS company can benefit from calculating CARR.
Why Does CARR Matter?
Here are the five primary reasons why your CARR should be extremely dear to you:
1. Offers an Accurate Picture of the Company’s Financial Health
Your ARR and MRR provide a gross overview of the total revenue you are expected to earn year on year or month on month. But the CARR can help you factor in the predictable revenue from new customers and churn rate based on the contracts that are not live yet.
This can give business owners a more accurate picture of the company’s overall financial health.
2. Differences in CARR and Net New ARR Can Reveal Flawed Retention Strategies
Your net new ARR includes revenue from new bookings and upsells during a period.
A significant difference between net new ARR and your company’s CARR could be troublesome for the customer success team.
Why?
If you’re acquiring new customers at a good rate but not seeing corresponding growth in CARR, it suggests that customers are not renewing their subscriptions or are downgrading tiers.
On the other hand, if your CARR is growing steadily but the net new ARR is not increasing at the same rate, it could indicate that your sales team is not able to upsell to existing customers to generate incremental revenue.
In either scenario, you need to figure out the “why” behind the difference.
The answer to this question can help you uncover potential loopholes in your customer retention strategies that could be affecting your revenue growth. The quicker you catch these, the better!
Chances are you’ll need to improve your customer support, address product or service issues, or offer incentives to retain every existing customer.
3. Assists Start-ups to Accurately Map Their Potential
According to the GAAP revenue principles, revenue shouldn’t be recognized until a contract begins or a product is served.
But when it comes to early-stage companies and startups, tracking CARR and contracted monthly recurring revenue is a significantly more accurate measure of their health and success.
It can help investors forecast predictable revenue more accurately and assess the financial standing of a SaaS company.
4. Equips You Better for the Future
In addition to forecasting, your CARR and CMRR can better equip you for future planning.
The data about your retention, expansion, churn rate, etc., can help guide your pricing and marketing strategies. The strategic tweaks can improve your annual contract value, acquisition costs, and lifetime value.
Clearly, the perks of tracking CARR are hard to ignore.
But is CARR the right metric for every business?
Who Should Be Using CARR?
Tracking committed annual recurring revenue makes the most sense if:
1. Your Saas Subscription Business Is Growing Extremely Rapidly
No doubt tracking recurring revenue on an annual basis is crucial for any SaaS business.
But, let’s say your business is growing at an exponential rate, say 100%+ year-on-year. If a good chunk of your contracts haven’t gone live yet, then your ARR would only tell a half-baked story.
In that case, your committed recurring revenue can give you a better idea about the progress of annual subscription bookings and your business’s future potential.
2. There’s Usually a Delay in Deal Booking to Actual Usage
When it comes to an enterprise-level subscription business, it can take longer for the customer to onboard and start using the product.
This leads to a delay between the booking and actual product usage. Since these contract sizes are massive, tracking just the ARR for the transitioning months can present a skewed picture of your revenue growth. This is why tracking CARR here becomes critical to map the actual revenue coming in.
Now, tracking the metric is just half the job done.
As mentioned earlier, you need to keep improving your CARR.
Let’s find out how.
3 Surefire Ways to Improve Your CARR
Here are a few steps you could take to grow your CARR metric:
1. Increase Customer Retention and Expansion
Since churn is a crucial leg of CARR, you need to keep it low to keep your CARR high. To reduce your churn rate and retain your customers, you should:
- Offer excellent customer service and support to keep customers satisfied.
- Identify customers prone to leave and engage with them proactively.
- Identify opportunities to upsell and cross-sell your products.
- Offer personalized offers via AI and product analytics that meet their needs and preference and ensure customer success.
- Introduce customer loyalty programs to incentivize customers that stick with your brand.
2. Keep a Tab on Customer Contracts
Since your CARR closely monitors contracts or sales deals won, you should try to:
- Monitor contract expiration dates and engage with customers, helping them renew their deals.
- Identify customers who are not likely to renew and try to address their concerns.
- Establish clear communication with customers throughout the contact period so they feel well taken care of.
- Dig into your product usage data and net promoter scores (NPS) to understand customer satisfaction levels and drive renewal conversations.
3. Strive to Improve Continuously
Becoming complacent is the biggest threat to your growth. That’s why you should:
- Use product usage data and analytics to identify trends and opportunities for product improvement.
- Assess and optimize your pricing strategies to better suit customers’ needs and budgets.
- Improve product features and introduce new ones based on customer feedback.
- Ensure that your sales and customer success teams are aligned in their revenue goals and strategies.
Now, you know how, why, and when to calculate your CARR and ways to improve it.
Covered next are some related metrics that you can track along with CARR for a holistic view of this SaaS KPI.
5 CARR-Related Metrics You Should Know About
Here are five critical metrics to track, especially if you have a longer wait time before your contracts go live:
- Annual Contract Value: The annual value you earn from a customer’s subscription over a year. Annual contract value excludes non-recurring sales like maintenance and customer support services.
- Total Contract Value: The total value of a customer’s subscription measured over the lifetime of the contract. For example, the total contract value of a two-year contract will be twice the amount of its annual contract value.
- Time to Go Live: The time it takes for customers to complete onboarding and start using the product.
- Bookings: The total value of new contracts signed or the total value of the deals won. While calculating bookings, you should record the contract’s total value even if it spans multiple years.
- Billings: It’s the next stage after booking. Billing is the process of collecting money from your customers who have booked your product or service. Your billing value can most accurately reflect the cash flow of your business.
CARR: The Right (Office) Candidate For Long-Term Growth
Understanding the difference between CARR vs ARR is crucial for any business that runs on the subscription model. While ARR provides a snapshot of the current revenue, the CARR is a more accurate representation of your business’s financial standing.
You could improve your CARR by providing exceptional customer service, proactively engaging with your customers, and identifying opportunities to expand customer accounts.
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