ARR growth rate: Improve your ARR

The ARR growth rate is one of the most critical metrics for your SaaS business. It measures how fast your customers renew or upgrade their subscriptions over time. 

ARR growth rate is the growth in ARR during a specific period, usually over 12 months. It indicates the speed of your business's growth and can be very helpful for strategic financial planning. ARR Growth is one of the most substantial factors impacting early-stage valuations, so it's important to monitor when preparing for a raise or financing.

Read on to find out what the ARR growth rate means for your business and how you can accelerate a healthy growth rate in your SaaS company. Then keep reading to understand how the ARR growth rate can help your business soar.  

What is ARR growth rate? 

ARR stands for annual recurring revenue, which is a way of measuring the value of a subscription. 

So ARR growth rate is the average recurring revenue growth over a particular time. Usually, the ARR growth rate is calculated for over 12 months. 

This metric is essential for two reasons:

1. It gives you a clear picture of your customer retention rate
2. It allows you to predict your future potential revenue. 

There are plenty of metrics to track revenue as a SaaS business owner. Still, it can be challenging to know which ones are the most important and how to interpret the data in a helpful way. ARR growth rate is a metric that can help you gauge how well your SaaS business is performing and identify areas where you can improve.

How to calculate ARR growth rate?

To calculate the annual recurring revenue growth rate for your SaaS business, you'll need the following information:

1. Your annual recurring revenue at the beginning of the year.
2. Your annual recurring revenue at the end of the year.

The following formula computes the ARR growth rate (in percentage) – 

 [Ending ARR / Starting ARR] - 1

‍For example, the ARR for a company at the beginning and end of the year is $150 and $200, respectively.

The ARR growth rate for that year will be

 [(200/150) – 1 ]= 0.333 or 33.3%

Another method to calculate ARR growth is through the monthly recurring revenue (MRR) growth rate.

Why is ARR growth rate important? 

This metric is essential to track if you want to grow your SaaS business. The annual recurring revenue growth rate shows how many customers renew their subscriptions and how many are upgrading to larger subscriptions. When you know the ARR growth rate for your SaaS business, you can make strategic decisions about how to grow your customer base and increase revenue earned. You can also see if you're meeting your customers' needs and improving your product.

According to the reports by Bessemer Venture Partners, their SaaS portfolio companies have an average ARR of $1 to $10 million, with an ARR growth rate of around 160% per year. Of those businesses, the ones belonging to the top and bottom quartiles had 230% and 100% ARR growth rates, respectively.

ARR growth rate strongly correlates with a SaaS company's valuation, especially at its early stage. At the early stages of the companies, there is a correlation of 0.7 between the ARR growth rate and the ARR valuation multiple. Firms in the top tier of ARR growth rates– greater than 230% raised capital at roughly 39 times their ARR. Whereas companies with an average growth rate– of 160% raised funds at 19 times the ARR.

The ARR growth rate will make it easy for you need to make well-informed and strategic business decisions, both toward existing customers and emerging ones. Naturally, this will allow your business to be ranked high in the SaaS industry. 

Early-stage startups are not exempt. You must monitor this metric and all related ones, such as the median ARR growth rate, the net MRR growth rate, and generally others that measure the company's recurring revenue.

The insight will effectively help you accelerate growth year over year as well as enhance customer retention. Failure to do this would result in growth rates decline. 

As a SaaS business, you must prioritize calculating the ARR growth rate. It has a massive impact on your sales process.

What is a good ARR growth rate?

The ARR growth rate is an excellent indicator of whether your business is growing and thriving or not. Your SaaS business's ideal ARR growth rate is between 20% and 50%. 

Why? Under 20%, your company isn't growing fast enough to become a successful business in the long term. Beyond 50%, you don't have enough time to bring in the revenue to keep up with your costs. 

Hence, there is no such concrete number that is considered a good ARR growth rate. We suggest having a high ARR growth rate because it indicates progress in the company. However, the average ARR growth rate for SaaS companies having $1 to $10 million ARR is 40%. So this can be used as a benchmark for your company to create a strategic plan for the future.

This is a reality most SaaS companies fail to take into account. Because little drops of water make a mighty ocean, what comes into your business monthly, which is captured in your Net MRR growth rate, enhances your total revenue and ARR growth rate for that period. Overall growth will be guaranteed.

‍3 ways to achieve a healthy SaaS ARR growth rate

To achieve a healthy ARR growth rate and accelerate your SaaS business growth, you can either focus on one of three approaches or embark on a strategic combination. They include:

1. Increase your customer retention rates
2. Attract new customers
3. Get existing customers to upgrade 

Let's look at each one in detail.

Increase your customer retention rates

Retention rates are the percentage of customers returning to purchase from you again. This reflects in your net MRR growth rate. It is an essential metric for SaaS businesses because every customer you lose is likely to be replaced by a new customer, and that takes time and money.

Retention rates tell you how likely your customers are to come back to buy subscriptions from you, making it easier to predict future revenue growth. You can increase your customer retention rates by:

1. Offering exceptional customer service, including special packages for long-term, loyal customers. 
2. Communicating the value of your product by a creative means and on an ongoing basis.

If you're keeping track of your customer retention rates, it's easy to see whether you're meeting your customers' needs and improving your product. One-time payments from customers will be minimized or even scraped out completely. Customers will be encouraged to patronize your brand from month to month, year over year.

Attract new customers

Arguably the best way to increase your ARR growth rate is to bring in more customers. New customers help reduce your MRR churn rate since every new customer is less likely to churn than an existing one. Inevitably, this means that your net MRR growth rate stays healthy. You can attract a new customer base by:

1. Creating an updated and informed marketing strategy. This will grab the attention of your target customer base. It is a massive step toward securing their purchase.
2. Measuring customer acquisition costs so the management team can be better equipped to bear the capacity of new entries into the system. Also, they can latch onto new trends and anticipate future ones because a predictable manner would be noticed.
3. Improving your sales process by enhancing the quality of your sales copy, sales funnel, and value-based pricing. The Attention, Interest, Desire, and Action (AIDA) model is highly effective here.

It's essential to set goals and track your marketing efforts so you know what's working and what isn't. You can also use lead scoring to identify which leads are most likely to buy from you. Furthermore, the excellence of your subscription service delivery towards existing customers can move them into becoming unpaid yet passionate marketers for you as they will recommend your services to people around them. This can turn merely interested individuals into active, paying customers.

Get existing customers to upgrade

Another way to increase your ARR growth rate is to get your existing customers to upgrade their subscriptions. This is another significant means through which most SaaS companies grow. If you're not doing this, you're missing out on a substantial source of expansion revenue.

This extra income for your SaaS business stems from upselling and cross-selling techniques. Some ways to add more excellent value to your subscription service and get your customers to upgrade include: 

1. Offering discounts for early birds
2. Creating educational content around your product/service to drive engagement over prolonged periods.
3. Launching a new product or feature for added value. It creates added value that will drive excitement and reel existing customers deeper.

To accelerate your SaaS business, you must get your customers to opt for ongoing service. Amongst other benefits, it can cater for lost revenue in previous quarters.

Conclusion

The ARR growth rate remains a key metric of your SaaS business. It measures how fast your customers renew, expand their usage, and upgrade to larger subscriptions over time.

By tracking your ARR growth rate, you can make strategic decisions about how to grow your customer base and increase revenue. You can also see if you're meeting your customers' needs and improving your product.

To achieve a healthy ARR growth rate, you can increase your customer retention rates, attract new customers, and get your existing customers to upgrade to larger plans. All these will limit growth rate decline and, in effect, result in tremendous customer success and higher total revenue year over year.

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