Learn the difference between recurring monthly income (annual income) and how to choose which one is best to measure your business’ growth. Learn what is annual income and how it is different from gross income ?
Subscription models are different from traditional models, and they require their own metrics. MRR and ARR are two of these metrics. We will be discussing the differences between annual income, recurring monthly income, and how they can be used to measure growth in your business.
What is the difference in annual income and recurring income monthly?
Subscription businesses generate predictable revenue. Customers pay fees to subscribe. These recurring revenues can either be measured monthly (MRR), or annually (ARR).
It is much easier to calculate recurring monthly income and annual income than you might think. For example, monthly income is the sum total of all income from subscriptions during a given month.
Companies that are interested in expanding their reach can also measure recurring monthly income, such as expansion or new business.
This is especially important for SaaS businesses that specialize in certain types or at particular stages of growth. Others may prefer recurring annual income.
Multi-year agreements allow clients to determine their annual recurring income by dividing the total amount of their agreement by the term. A four-year contract at $20,000 would generate $ 5,000 in recurring annual income regardless of any non-recurring charges.
To calculate their annual income, many companies that have shorter terms increase their monthly income 12 times. This is a common practice but be cautious.
Temporarily inflated subscription numbers can be used to overestimate your annual income if your business is experiencing seasonal fluctuations or has just gotten a lot more customers after a promotional offer.
Additionally, clients may not be obligated to stay for more than a year. This calculation could not be accurate, which would mean that it might have some inaccuracies in the month-to month rotation.
It is important that you note that monthly and annual incomes are only calculated from subscription income. Recurring income does not include one-time fees or prices that are subject to change.
The ARR provides a better picture of a company’s financial health than recurring monthly income.
SaaS business metrics
Both ARR and MRR are important metrics to monitor. But which one is best for you?
Five factors are required to correctly decide between MRR and ARR.
1. The subscription term.
It is a good indicator of which metric might be right for your SaaS business if you have subscriptions that last longer than one year.
Accounting experts suggest that annual recurring income should be calculated in relation to annual terms. The minimum contract size must be one year. Many agree.
Modern SaaS businesses that have shorter terms simply multiply the monthly income by 12 to get the recurring annual income.
2. Complexity of the business model
It is not uncommon to see more complex subscription models as a subscription model scales. Annual recurring income is a different calculation. While ARR and MRR are based on recurring income, it allows you to assess other factors and make predictions about monthly income. This is another distinction between recurring monthly income and annual income.
3. The size of the business.
SaaS companies should use annual recurring revenue (ARR) instead of monthly recurring revenue (MRR) because most companies do annual contracts and not monthly.
4. Investor interest
It is worth knowing that investors love recurring income if your company is looking to raise capital. It is a better indicator than monthly recurring income and will be the most important metric investors want when evaluating a company.
Your valuation will not be based on monthly income but only on an annual recurring income.
