SaaS is among the fastest-growing industries right now. There is a favorable environment for SaaS businesses due to –
- Digital-first markets
- Cost-effective customer engagement
- Easy accessibility
While most other businesses suffered during the pandemic, SaaS remained resilient and instead displayed remarkable growth. Things are particularly bright for the Indian SaaS ecosystem, which is expected to reach a valuation of $1 trillion in the next 10 years.
In short, the SaaS industry is currently a goldmine of opportunities for investors, founders, and technical experts alike. If you also own a SaaS business then you’d be interested in having a piece of this huge pie.
But to do so, you need to maximize growth. For any recurring revenue business model, growing the annual recurring revenue (ARR) would be on top of their priority list.
If you are looking for strategies to grow ARR for your SaaS business then you are in the right place. In this article, we are going to share the 5 best strategies to grow the ARR of your SaaS business.
But first, let’s begin by understanding what ARR is.
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What is ARR?
Annual recurring revenue, also known as ARR, is the overall annual revenue generated from subscriptions and other recurring billing cycles. It is one of the key metrics used to assess the health and growth of a SaaS business.
ARR gives a clear picture of how your business is generating revenue. It indicates how capable your business is at acquiring new customers and retaining existing ones.
ARR plays an important role in predicting the growth trajectory of your SaaS business.
How is ARR different from MRR?
ARR and MRR are two commonly used metrics used to determine the growth of a SaaS business.
In simple terms, ARR = 12 x MRR.
That’s the difference between the two. While ARR is used for annual revenue, MRR is used for monthly revenue.
Sometimes confused with ARR, the monthly recurring revenue or MRR is the amount of revenue expected by a SaaS company on a monthly basis. It is the sum of the total monthly revenue generated by a SaaS business.
While the ARR metric is quite useful in board meetings and conversations with management, the MRR metric is often more useful in the day-to-day operations of the SaaS business.
Objectively speaking, MRR is not better than ARR or vice-versa. You can use both these metrics as you see fit.
How to calculate ARR?
To calculate ARR for your SaaS business, you can use the following basic equation to get started –
ARR = (Overall subscription cost per year + Recurring revenue from add-ons) – Revenue lost due to cancellations
Why is calculating ARR important?
If you are wondering “Why should I care about calculating ARR?” then we have the answer for you.
ARR is important for tracking the health of your subscription business. It gives you in-depth knowledge of your company’s financial standing and helps you understand where you stand in achieving your yearly growth goals.
ARR can help you plan for the long term. Understanding you ARR can be the driving factor that separates successful SaaS business from the unsuccessful ones.
Let’s see how calculating this SaaS metric can help you in different areas –
• It allows forecasting future revenue
ARR acts as the baseline on which you can do more complex calculations. You may develop a credible image of what success looks like in the future by comparing your churn rates, acquisition goals, or anticipated pricing and packaging modifications to ARR.
Without ARR, it’s difficult to understand the real customer impact of the choices your company makes.
• It lets you set realistic goals
A good understanding of your company’s ARR will help you set realistic targets and goals. ARR provides valuable context for future decision-making. It helps you see areas of opportunity in your current business model and then set realistic goals that can actually be achieved.
• It helps track growth
ARR is an ideal metric to provide a figure for tangible growth. You can use it to map the most efficient path forward for your business. ARR lets you see the impact of changes you’ve made on a year-on-year basis, and thus helps you track growth.
• It helps determine customer acquisition cost (CAC)
Customer acquisition cost or CAC is a metric that is used to determine the cost involved in acquiring a new customer. CAC is important to determine the profitability and efficiency of your SaaS business. Calculating CAC relies heavily on ARR, which acts as an important base metric.
• It helps determine the production budget
By calculating ARR, you can estimate the budget that you can allocate for launching new products. With an existing customer base, it’s essential to grow your business offerings through new products.
5 best strategies to grow ARR
By now, you must have understood the importance of ARR. So growing ARR is a target for every SaaS business since it signifies growth. If you also own a SaaS business and would like to grow your ARR then these 5 strategies might help –
1. Find your ideal growth channels
Since your main objective is to grow annual revenue, you need to identify one or two growth channels that will help you get there.
Different growth channels include –
• Banner ads: To promote your product on third-party websites.
• PPC: Using search engine marketing like Google ads to rank for relevant keywords.
• SEO: Using content marketing to organically increase the online presence of your website.
• Cold email: Building a list of potential clients and then reaching out to them through email.
• Cold calling: Reaching out to prospects through the phone.
• Social media: Using social platforms to reach out to the ideal audience.
It’s all about how willing you are to work hard on the growth of your business. It does not matter which growth channel you use, as long as you are willing to put in the effort. Ideally, you must try all these channels and then finalize a few that work best for your business.
2. Upsell to existing clients
You must often reach out to your existing customers for growing your business with them. It can be in any of the following ways –
• Upsell higher versions of your product.
• Unlock more features through add-ons.
• Cross-sell related products.
• Revise product pricing once in a while.
• Sell more licenses for new users.
You can upsell to your existing customer base to increase business. The expansion ARR gained from upselling can be beneficial for your SaaS business.
3. Promote annual plans
Annual plans are a great way to grow your ARR. Without appearing to be spammy, you must reach out to your customers to nudge them to switch to annual plans.
Give them more benefits for switching to an annual plan from a monthly one. This would make it lucrative for the customers to choose annual plans and would make them consider switching.
For example – Check out how WordPress gives additional benefits on choosing annual plans.
4. Address customer churn
As your SaaS business grows, your customer churn or customer attrition rate will also increase. That is why you need to address it if you want to increase your ARR.
You can hire someone like a customer success person or a product metrics person to look at your customer churn rate. The goal of such consultants should be to find bad customers. They need to figure out where the high churn is coming from.
This would allow your business to fix what’s wrong in the funnel and reduce doing that specific activity that’s increasing your churn.
5. Increase customer retention
To optimize your ARR, it’s essential to retain as many existing customers as possible. This can be done when your product is aligned with your customer needs.
You can also improve customer retention by taking the following steps –
• Engage with your customers – Interacting with your customers should be a key emphasis for your SaaS business. You must work on optimizing all the customer touchpoints so they have an ideal experience when interacting with your business. There must be an ongoing feedback mechanism so the customers can feel free to share their inputs. You must also look at communicating with customers across multiple channels like email, phone, social media, app notifications, etc.
• Deliver exceptional customer support – Customer expectations are higher these days than they’ve ever been. Poor service may cost businesses massive profits. So, you must ensure exceptional customer support. The tickets raised by customers should be resolved on a priority basis. It’s essential that you build trust with customers through great customer support.
• Optimize your pricing to promote retention – Optimizing the pricing of your service to make it a value proposition can have a positive effect on customer retention. Discounts may have a short-term benefit but to retain customers, you need to provide excellent service that customers won’t get anywhere else.
• Improve the onboarding process – An intuitive and easy onboarding process may make or break a customer’s decision to stick with your product. Customers will flee quickly if your software isn’t intuitive. By improving your onboarding process, you can increase the chances of customer retention.
• Incentivize customer retention – If you own a SaaS business, you must design your internal metrics to incentivize customer retention. This one simple change can help massively improve retention rates.
Conclusion
In this article, we talked in detail about all aspects of ARR as well as the strategies to grow your ARR. If you are a SaaS business owner, you would have understood the importance of having a healthy ARR.
We hope we were able to answer most of your queries regarding ARR. If you still have any questions left, use the comment feature below.
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