How To Calculate Annual Recurring Revenue

The key term in this calculation is ARR or annual recurring revenue, which we will calculate here. You can learn more about why this is important here. But for now, just know that it’s how much money you make per year from your business!

Most companies with a successful online presence have an e-commerce site or a mobile app. With these sites, you earn revenue when someone either buys something or uses the service.

A lot of times, however, people talk about earning income through content marketing or advertising. While both of those are great ways to bring in revenue, what many don’t realize is that they also offer a very valuable metric: ARMR!

What is ARMR?

Annualized monthly recurrent revenue is the same thing as ARRR or annual recurring revenue. It simply calculates how much money you made per month from your source, then multiplies that by 12 to get the total amount earned each year.

The difference between ARMR and ARRR comes down to the frequency at which you're able to produce content or run advertisements. For example, if you're only able to create content every other week, you'll be paid less annually than someone who produces content twice a week.

Multiply the number of times you would like to repeat your product or service by the average price of your product or service

how to calculate arr annual recurring revenue

Now, let’s calculate ARR for an example. Say you want to run a business that offers t-shirts with motivational messages on them to promote your company. You can create your own t-shirt design or choose one from another source to use as a template.

You could then market the shirts yourself through social media sites such as Instagram or Facebook, or hire someone else to do it for you. Or you can buy pre-made t-shirts at regular prices and add your own message on top.

The important thing to note here is that even if people are buying the t-shirts already, they still need to know about your product to actually purchase it.

Calculate the amount you would like to charge your clients to repeat your product or service

how to calculate arr annual recurring revenue

Now that you have determined how much you want to make from your business, you will need to determine what price you should be charging for your services. This is done through calculating your average ARR!

To calculate this, you take your total revenue and divide it by the number of months in your launch period and then multiply that value by twelve.

This gives you your monthly ARR which you can then increase or decrease depending on if you are able to provide more services or not. For example, let’s say you wanted to start a website design company. You could easily run with a $1,000 per month budget unless you ran out of money before the end of the year.

By setting a higher monthly income goal at the beginning of your business, you give yourself some wiggle room to fail financially without too much stress. It also helps promote longer term success as you have a set income target every month.

However, if you over spend your income each month, it may put pressure on you to keep up with your spending goals.

Subtract your monthly expenses from your estimated annual revenue

how to calculate arr annual recurring revenue

Now that you have determined how much money you will make per year, you can now determine how much it will cost to run your business each month!

You should now be able to see how much money you will have left at the end of each month. Simply subtract your monthly costs from your yearly income to find the amount of cash left in the bank at the end of each month.

This is important because it determines whether or not you are financially stable for the next twelve months. It also helps you identify what types of changes need to be made so that you are more efficient with spending money.

For example, if you found that you had $1,500 every month but your monthly budget was only $2,000, then you would definitely want to look into reducing your monthly spend. You could possibly even consider finding part time work to reduce your overall monthly expenditure.

Alternatively, if you found that you only had $700 left after paying all your bills, then you might want to evaluate whether owning a house is really worth it. A less expensive place to live may be better for your personal life as well as your professional one.

Multiply the difference by 5 to get your initial investment

how to calculate arr annual recurring revenue

Now that you have determined how much money you will need for your business, what is next? Depending on whether you are building your business from scratch or expanding an existing business, you will now determine how much revenue you want to receive per month or yearly!

To calculate annual recurring revenue (ARR) of your business, simply multiply the monthly revenue goal by 12. For example, if your monthly revenue goal is $1,000 then your ARR would be $12,000 per year which is also referred to as your gross income.

Most small businesses earn enough in monthly revenues to make a good initial investment so they do not have to worry about having enough to invest.

Divide the initial investment by the number of times you would like to repeat your product or service

how to calculate arr annual recurring revenue

Now that you have determined how much money you will need for your business, your next step is to determine how many times you want to re-enter the market with your products or services. This is your recurring revenue goal!

Most entrepreneurs choose to launch their business once because they do not want to invest in resources until they are sure it will be successful. However, with the availability of online courses and other ways to learn basic skills, this no longer holds true.

By investing in your education before starting your business, you save time and energy for more important things like working on your business. That being said, it is impossible to know if your business idea will work without testing it.

The trick is to start your business with a small amount of capital so that you can test its viability. You may even be able to use the educational benefits available to you as an employee to help fund your company’s startup costs.

This is your annual recurring revenue

ARR comes from two sources: service subscriptions and product purchases in direct sales or affiliate marketing. A subscription can be to a monthly magazine, a fitness routine, or a Netflix membership that costs $12 per month. An indirect sale of an item is when someone else sponsors you by including an item in their giveaway collection or creating a review event for your products.

The difference between these two types of ARRs is how they are calculated. With direct sales, it is simple adding up all of the individual transactions over time. Affiliate marketers look more broadly at past revenues as well as projected future revenues.

By using both approaches, there is no wrong way to calculate your ARR! What matters most is what computes best for your business and what numbers feel accurate.

This article will go into detail about each method and how to get the correct numbers.

Calculate the number of times you would like to repeat your product or service

how to calculate arr annual recurring revenue

The second part of this calculation is how many times you want to offer your product or service. This is typically referred to as the frequency, which is usually determined by whether you are offering a one-time sale or if it is an ongoing business relationship.

If your product is a monthly subscription, for example, then your recurring revenue will be calculated over that length of time. Therefore, your annual ARR value will increase proportionally!

To determine the average price per unit, take the total amount divided by the total units. For example, if you sold your products for $100 each, then its’ total cost was $100 per item, making the average price per unit = $50. That means the yearly ARV is calculated using (price per unit x nummber of units). In our case, it is ($50 x 12) or $600.

So, in other words, the higher the price per unit, the higher the ARR! Obviously, there is no need to go crazy with pricing, but ensuring you have enough income to cover your expenses is important.

Multiply the number of times you would like to repeat your product or service by the average price of your product or service

how to calculate arr annual recurring revenue

Now, let’s calculate the ARR for an example business with one year of sales. The example business will be offering a product that costs $1,000 per unit. They would like to offer this product twice a month for a total of 24 units in a one-month period.

To determine the ARR for this business, we first need to know how much money they made during their most recent sale cycle. In this case, it is easy to find as we have monthly data!

We can add up all of the monthly revenue numbers to get our next variable: gross profit. For this business, the gross profit was $2,000 so enter 2,000 in place of A+.

Now, we can multiply the number of months by the average cost to create our final variable: annual recurring revenue (ARR). In this case, it is simple to do so because there are no other variables. We just take the sum of both gross profit and cost and divide each side by two.

In this case, the equation is simply 2,000 x 1 = ARR which equals $2,000 annually.

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