The views expressed by the business participants are their own.
In today’s business environment, companies often rely on subscriptions as the main driver of revenue. Whether it’s in the form of consumer-facing subscription boxes or SaaS platforms, many companies have realized the importance of setting up systems that deliver consistent, recurring revenue from their customers. In fact, the subscription economy is expected to reach $1.5 trillion by 2025.
Of course, like any other business, subscription-driven companies need to be able to effectively track their revenue to identify growth opportunities and challenges – and one of the best ways to do that is by looking at their annual recurring revenue (ARR).
Related: 5 Keys to Building Business Subscribers That Won’t Stop
What is ARR, and why is it important?
Annual recurring revenue is a key metric in the subscription economy that measures the recurring revenue a business receives from its subscriptions over the course of one calendar year. ARR is based solely on subscription revenue and does not count one-time purchases or payments.
ARR is usually calculated on a per-customer basis — dividing the total price of the subscription contract by the number of years in the subscription contract. Adding the annual subscription value of each customer gives the total ARR.
As the Corporate Finance Institute explains, ARR is an important metric for subscription-driven companies because it helps them measure growth, evaluate the success of the subscription model and predict future revenue. With ARR, organizations are able to measure the lifetime of their business and whether current subscription revenue (and subscription growth) is aligned with the organization’s goals.
1. Introduce multiple pricing options
For organizations trying to increase their customer base to subsequently increase their overall ARR, introducing multiple pricing options can be a smart strategic move. This has become more common in streaming, where almost every broadcaster has introduced multiple subscription tiers, largely divided into ad-supported and ad-free content.
For example, after launching its ad-supported division a little over 18 months ago, Netflix’s ad-supported division now has over 45% of new subscribers – a clear indication that offering programming at a lower price makes its offering more budget-friendly. -rational consumers.
Offering multiple categories or pricing options is certainly not limited to streaming. Many SaaS businesses are also successfully using this model, with pricing based on factors such as the number of users who have access to an account, the amount of available storage or bandwidth and other factors.
Often, many of the most desirable features are locked behind the higher price tier, encouraging subscribers to choose the more expensive option. However, by giving your audience multiple price points to choose from, you can increase ARR by becoming more desirable to both budget-oriented and feature-oriented audiences. A price increase can also make your core service category more attractive, driving more motivated signups and revenue growth.
Related: 5 Tips to Grow Your Subscription Business
2. Be strategic about price increases
One common tactic businesses use to drive signups is to offer a price promotion, often getting users to sign up at a deeply discounted rate for the first year before returning to the regular price in future years. While discounts are effective in driving sign-ups, they can be even more powerful when backed by a strategic campaign.
Written by one of the founders, Iman Gadzhi, case studies from Flozy show how successful promotions can be driven beyond an attractive price point. In the build-up to 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 presented a significant discount on the company’s annual program, it was also supplemented with free educational content and live events with the founding team. This strategic approach that went beyond simple price increases resulted in a 1,000% increase in profits – and helped demonstrate the fundamental value of subscriptions from the start.
3. Make sure you have the necessary programs and support in place
As important as growth-oriented strategies are, retention cannot be overlooked. If you have high subscriber conversion rates, then you don’t have annual recurring revenue. Instead, your subscription-based business will operate like a traditional business model, where you have to repeatedly pursue sales and new customers.
Because of this, businesses with ARR as a key performance metric should invest heavily in customer satisfaction and retention efforts. In the Flozy study cited earlier, after the company’s initial growth, implementing 24/7 support and daily customer service sessions offering real-time help played a major role in helping to satisfy existing customers while also driving new monthly growth when the company relaunched. marketing.
Businesses should regularly assess the pain points that cause customers to cancel their subscriptions and focus on processes and procedures that affect these areas. Correcting deficiencies and finding ways to increase the value you provide to your existing subscribers is key to keeping them around over time. Such actions can also lead to price increases that can be attractive, as long as subscribers still feel like they are getting a good value.
Related: How To Improve Your Subscription Business Rate
In subscription-driven business models, few metrics are ultimately more important than ARR. By prioritizing this metric as part of your acquisition and retention process, you can identify efforts and processes that will help you build a loyal customer base that generates reliable revenue for years to come.
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