How is ARR (Annual Recurring Revenue) Calculated

Annual Recurring Revenue (ARR) represents your business's predictable income annually through subscription-based customers. This calculation is key for forecasting growth and planning your business strategy.

Factors that Influence ARR Calculation

ARR depends on three key components:

1. Product Type: The product must be configured as "Count to MRR/ARR".

   
2. Product Dates: Include relevant contract dates, invoices, and credit memos.

3. Product Amount: This is the monetary value assigned to each product line.

Calculating MRR (Monthly Recurring Revenue) and ARR

Once you have these inputs, the following formulas are applied to calculate MRR and ARR:

• Calculating MRR (Monthly Recurring Revenue) MRR= Line Item Value/ Number of Months

  Example: If a subscription costs $120 over 12 months, the MRR will be $10.

• Calculating ARR (Annual Recurring Revenue) ARR = MRR * 12

  Example: If the MRR is $10, the ARR will be $120.

Recurring Revenue Classifications

Recurring revenue (RR) can be classified into different categories based on how it changes from month to month:

• Churn: The customer stopped generating revenue this month.

• Expansion: The customer's revenue increased compared to last month.

• Contraction: The customer's revenue decreased this month.

• New Sales: A new customer began generating revenue.

• Reactivation: A customer who wasn’t generating revenue has become active again.

Rillet automatically applies these classifications based on predefined rules.

Usage Impact on Recurring Revenue (MRR/ARR by Contract Type)

When importing usage-based invoices (like those from Stripe), the recurring revenue is only considered for the month of usage to prevent retroactive adjustments. Additionally, minor gaps between contracts won’t be classified as "churn" to avoid confusion, as the customer is still engaged.

Additional Considerations:

• Usage Billing: If there is usage-based billing (e.g., from Stripe), the recurring revenue impact is limited to the month of usage. This avoids retroactive changes to previous months.

• Contract Gaps: If there is a small gap between contracts (e.g., to align them with calendar months), it won’t be classified as "churn" or "reactivation". Instead, it will be classified as "contraction" or "expansion" if there are changes in recurring revenue.

• Configurable Option: You can classify "churn" only if the contract has been terminated. This is useful for open-ended or usage-only contracts that don’t have fixed recurring revenue and are typically invoiced monthly.