ARR calculation

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Anshi
Anshi Member Posts: 4 Navigator
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Hello Everyone! Very excited to begin my first discussion thread here. :)

I do understand ARR generally is MRR X 12. But what happens when customer contract is shorter and is less than 12 months, say just 10 or 11 months. In that case, is ARR still MRR x 12 OR it is MRR x contract duration?

Look forward to thoughts and inputs.

Thank you!

Anshi

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  • Stewart Stokes
    Stewart Stokes Member Posts: 17 Thought Leader
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    I'd lean towards MRR x 12. But more broadly I would suggest not to overthink it too much and pick something that is:

    1) Generally accurate

    2) Easy to administer

    This is especially true if these types of contracts are mostly edge cases. If they are common in your business then #1 becomes more important.

  • Anshi
    Anshi Member Posts: 4 Navigator
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    Thank you @Stewart Stokes! I think it does make sense - should be generally accurate.

  • jhilderbrands
    jhilderbrands Member Posts: 4 Navigator
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    Typically if you offer less than 12m subscriptions then you should adapt all your KPIs and targets to focus on MRR.

    This comes down to your cost and financial models matching your products and how you sell them.

    If you sell a minimum of 12m subscriptions then do everything in ARR and you will end up with some MRR focus anyway otherwise it's impossible to monitor the months and quarter cohorts but it's simply ARR/12.

    If you have to x12 that isn't actually a commitment subscription it's not a real number you can bank on and investors want to see predictable commited growth that is realised.

  • Anshi
    Anshi Member Posts: 4 Navigator
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    @jhilderbrands This is precisely what was concerning me that its not a 'real number' if we do x12 all the time. This use case is for one of my customers and I was trying to assess what's the best recommendation. Thank you!

  • jhilderbrands
    jhilderbrands Member Posts: 4 Navigator
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    If you are using it as a benchmark on historical billings as they have happened in the past year on year that is fine to sum up months into years.

    If you are projecting it though when it's not a contracted subscription it's better to stick with MRR.

    If you are say trying to scale your CSM workload by sticking to the often benchmark of 2.5m per CSM (I don't subscribe to this as it lacks context of average customer size) then it's fine to use ARR but then again you could just use MRR and divide. Most guidance I've seen says try to stick to the lowest common denominator.

    Hope that helps.

  • Anshi
    Anshi Member Posts: 4 Navigator
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    @jhilderbrands Wonderful! Appreciate your elaborate response! Very helpful.