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In today’s business environment, corporations often rely on subscriptions as a key revenue driver. Whether it’s consumer-facing subscription boxes or SaaS platforms, many corporations have recognized the value of establishing systems that deliver consistent, recurring revenue from customers. In fact, this is expected to be the case in the subscription economy reach $1.5 trillion in 2025.
Of course, like any other business, subscription-based businesses need to have the ability to effectively track their revenue to discover growth opportunities and challenges – and one of the best ways to do this is by analyzing their annual recurring revenue (ARR).
What is ARR and why is it necessary?
Annual recurring revenue is a key metric in the subscription economy that measures the recurring revenue a company earns from subscriptions over the course of one calendar yr. ARR is based solely on subscription revenue and does not include one-time purchases or fees.
ARR is often calculated on a per-customer basis by dividing the total value of the subscription contract by the variety of years the subscription contract is in effect. Adding the value of each customer’s annual subscription gives the total ARR.
As the Institute of Corporate Finance (*3*)explainsARR is a useful metric for subscription-based businesses because it helps them quantify growth, evaluate the effectiveness of their subscription model, and forecast future revenues. With ARR, organizations are able to assess the overall health of their business and whether current subscription revenue (and subscription growth) is aligned with the organization’s goals.
1. Enter multiple pricing options
For organizations trying to increase their customer base so they’ll later increase their total rate of return, introducing multiple pricing options might be a sensible strategic practice. This has change into especially common in streaming, where it happens to virtually every streamer Multiple subscription levels introducedlargely divided by ad-supported and ad-free content.
For example, after Netflix’s ad levels were introduced just over 18 months ago, Netflix’s ad levels are supposedly in line with what they are now over 45% of recent registrations — a clear indicator that offering a cheaper plan made the offer more attractive to budget-conscious consumers.
Offering multiple tiers or pricing options is definitely not limited to streaming. Many SaaS corporations also successfully use this model, with pricing tiers based on aspects corresponding to the variety of users accessing the account, the amount of accessible storage or bandwidth, and other aspects.
Quite often, many of the most desired features are hidden behind the dearer tier, encouraging subscribers to select the dearer option. However, by giving your audience multiple price points to select from, you’ll be able to grow your ARR by becoming more attractive to each budget-minded and feature-focused audiences. Scaling pricing can even make the entry-level service more attractive, further driving subscription and revenue growth.
2. Be strategic with price promotions
One common technique used by subscription-based corporations is to offer a pricing promotion, often encouraging users to enroll at a significantly discounted price for the first yr before reverting to the standard price in future years. While discounts are effective at driving sign-ups, they might be even more practical when backed by a strategic campaign.
Written by co-founder Iman Gadzhi, a case study Flozy shows how effective promotions might be based on greater than just an attractive price. In preparation for the company’s first Black Friday, their team created a significant amount of educational content to accompany the Black Friday campaign.
As a result, when the Black Friday campaign launched with a significant discount on the company’s annual plan, it was further complemented with free educational content and live events with the founding team. This strategic approach, which went beyond simple price promotion, resulted in a 1,000% increase in revenue and helped show the core value of subscriptions from day one.
3. Make sure you have the needed systems and support in place
While growth-oriented strategies are useful, they can not be ignored. If subscriber churn is high, you do not really have annual recurring revenue. Instead, your subscription business will operate more like a traditional business model where you have to repeatedly make sales to latest customers.
For this reason, corporations that use ARR as a key performance metric must invest heavily in customer satisfaction and retention efforts. In the Floza case study cited earlier, after the company’s initial growth, the implementation of 24/7 support and day by day customer support sessions offering real-time assistance played a key role in satisfying existing customers while also driving a latest monthly increase in growth following the marketing relaunch.
Companies need to repeatedly assess the pain points that cause customers to unsubscribe and focus on the processes and practices that influence these areas. Correcting gaps and finding ways to increase the value you offer to existing subscribers is the key to retaining them in the future. They can even make such actions potential price increases tastier so long as subscribers still feel they are getting good value.
For subscription-based business models, few metrics are ultimately more necessary than ARR. By prioritizing this metric in your acquisition and retention process, you’ll be able to discover initiatives and processes that can provide help to build a loyal customer base that can provide reliable revenue for many years to come.