What is Annual Run Rate Revenue (ARRR)?

 

What is Annual Run Rate Revenue (ARRR)?

Annual Run Rate Revenue (ARRR) is a metric business use to project their yearly revenue based on current performance. It is calculated by taking the total revenue for a certain period, such as a month or a quarter, and multiplying it by the number of periods in a year.

To calculate ARRR, a business would multiply its current monthly revenue by 12 if the current month represents the whole year. For example, if a company earned $10,000 in January, it would multiply that by 12 to project an ARRR of $120,000.

The ARRR metric is helpful for businesses with recurring revenue streams, such as subscription-based services or SaaS (Software as a Service) companies. It allows these businesses to forecast their future revenue and make more informed decisions about investments, hiring, and growth.

It is important to note that ARRR is a projection and not a guarantee of future revenue. It is based on current performance and assumes that the business's revenue streams will remain the same throughout the year. Therefore, it should be used with other metrics and factors to make informed business decisions.

How to Calculate ARR

To calculate ARR (Annual Run Rate Revenue), you need to follow these steps:

1. Determine the revenue for a certain period: Start by selecting a period, such as a month or a quarter, and determine the revenue generated during that time. For example, if your business earned $20,000 monthly, use that as the starting point.
2. Multiply the revenue by the number of periods in a year: Next, you need to extrapolate the payment for the entire year. To do this, multiply the income for the period you selected by the number of periods in a year. For example, if you chose a monthly period, multiply the revenue by 12 (for 12 months in a year).
3. Repeat the process for multiple periods: If you want a more accurate projection, calculate the ARR for various periods and take an average. This can account for any seasonal fluctuations or changes in revenue over time.
4. Consider other factors: While ARR can be a useful metric, it should be used with other elements to make informed business decisions. For example, changes in the market or unexpected expenses can significantly impact revenue, so it's essential to consider these factors when making projections.

Calculating ARR can help businesses to project their future revenue and make informed decisions about investments, hiring, and growth. However, it's important to remember that it is a projection based on current performance and not a guarantee of future revenue.

Difference between annual recurring revenue and annual run rate 

Annual Recurring Revenue (ARR) and Annual Run Rate (ARRR) are two critical metrics businesses use to measure their revenue. While they may seem similar, there are some critical differences between them.

Here's a breakdown of the differences in table form:

Metric	Definition	Calculation
Annual Recurring Revenue (ARR)	The annualized revenue generated by a business's recurring revenue streams.	Multiply the Monthly Recurring Revenue (MRR) by 12.
Annual Run Rate (ARRR)	The projected annual revenue based on current revenue trends.	Multiply the current revenue by the number of periods in a year.

To summarize:

• ARR is based on a business's recurring revenue streams, such as subscription-based services or contracts, while ARRR is based on the current revenue trends.
• ARR is calculated by multiplying the Monthly Recurring Revenue (MRR) by 12, while ARRR is calculated by multiplying the current revenue by the number of periods in a year.
• ARR is a more accurate metric for businesses with recurring revenue streams, while ARRR helps project future revenue based on current performance.

Overall, both ARR and ARRR are valuable metrics for measuring a business's revenue, but they serve different purposes and are calculated differently. Companies should consider metrics and other factors to make informed decisions about investments, hiring, and growth.