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Calculating Annual Recurring Revenue For SaaS Company

SRIDHAR RANGANATHAN's Profile

We are a SaaS cloud based start up. We are trying to arrive at ARR and MRR for our business. We have both Annual Contracts (>=12m) and Semi-Annual (2m/3m/6m) contracts as well. For calculating ARR we were told that we should consider both the contracts Annual/Semi-Annual ones. Here are my clarifications: (1) Whether we should consider both the contracts for Company wide ARR for a SaaS model? (2) How to compute ARR if we have only Semi-Annual Contracts. Assume we have $ 120 K contract for a period of 6 months, the MRR at a given point of time is $ 20 K and the ARR at the end of 6th month is $ 20 K * 12=$ 240 K. The concept here is that though this current contract may end at 6th month (or renew ), other contracts will fill up post that and hence ARR should be $ 240K. Is this correct? (2) For MRR, my understanding is that is should be simply computed by total contract value divided by the term of the contract.

Answers

Ivy Freeman
Title: Director, Finance
Company: Anonymous
(Director, Finance, Anonymous) |

This is what I found on this website:http://saasoptics.com/SaaS-opedia/saas-opedia/ARR/arr.html

"ARR is the less frequently used alternative normalization method of the two common ones, ARR and MRR. ARR is used almost exclusively in B2B subscription businesses.

In order to effectively use ARR as a metric in your business, you must have term agreements with a minimum duration of one year, or the majority of your term agreements must be one year or more. ARR is typically adopted by subscription businesses with multi-year agreements."

Sounds like you should not include contracts less than 12 months in length in your ARR calculations.

SRIDHAR RANGANATHAN
Title: GLOBAL FINANCE CONTROLLER
Company: JIFFLENOW
(GLOBAL FINANCE CONTROLLER, JIFFLENOW) |

Thanks Ivy,

So if a business typically has Semi Annual contracts alone (3m/6m), then there is no ARR for that Company.? is that the understanding?

Scott fischer
Title: President
Company: CFO Idaho, Inc.
LinkedIn Profile
(President, CFO Idaho, Inc.) |

Ive consulted with Saas startups and used MRR for analysis and planning. We included the monthly portion of annual or multi-month contracts. Why? Because it is inclusive of all recurring revenue and it was more representative of the nature of the revenue streams (mostly < annual) For reporting, we split ARR from Monthly and then combined to a common number.

Exclude all one-time charges from the metric, such as set up fees, training, data migrations, etc.

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