Defining Committed Annual Recurring Revenue (CARR)

Committed Annual Recurring Revenue (CARR) is a revenue metric that measures the annual committed revenue generated by a business. It only includes revenue generated by existing customers who have signed contracts or made purchase commitments for a set period of time, such as one or three years. CARR is especially relevant for companies that sell enterprise software or other long-term solutions, as it provides insight into the expected revenue for the upcoming year.

Defining Annual Recurring Revenue (ARR)

Annual Recurring Revenue (ARR) is a revenue metric that measures the annual recurring revenue generated by a business. It takes into account the revenue generated by both new and existing customers over the course of a year, but it only includes revenue generated by subscriptions or other recurring purchases. This metric is useful for companies that rely heavily on recurring revenue streams and need to track their revenue growth over time.

Breaking Down ARR and CARR

Components of ARR

ARR is made up of two primary components: customer count and average revenue per customer. Customer count refers to the total number of customers who have purchased a subscription or made a recurring purchase over the course of a year. Average revenue per customer is the average amount of revenue generated by each of these customers over the course of a year. To calculate ARR, simply multiply these two figures together.

Components of CARR

CARR is made up of the revenue generated by existing customers who have made purchase commitments for a set period of time. To calculate CARR, simply add up the revenue generated by these customers over the course of the year. The length of the contracts or commitments can vary, but the revenue for each customer is typically divided evenly across the length of the commitment period to arrive at a consistent annual figure.

Comparing ARR and CARR: Key Differences

The primary difference between ARR and CARR is how they account for revenue generated by new customers. ARR includes revenue generated by both new and existing customers, while CARR only includes revenue generated by existing customers with commitments or contracts. ARR provides a broader picture of a company's recurring revenue streams, while CARR provides a more accurate view of the revenue that can be expected in the upcoming year.

Calculating ARR and CARR

How to Calculate ARR

To calculate ARR, you will need to determine the total number of customers who have made a recurring purchase or subscription over the course of a year. You will also need to calculate the average revenue generated by each of these customers over the course of the year. Once you have these two figures, simply multiply them together to arrive at the ARR figure.

How to Calculate CARR

To calculate CARR, you will need to add up the committed revenue generated by existing customers over the course of the year. This includes revenue generated by customers who have signed contracts or made commitments to purchase products or services for a set period of time.

Examples of ARR and CARR Calculations

Let's say that a software company has 1,000 customers who have signed up for a monthly subscription that costs $100 per month. The company's ARR would be calculated as follows:

1. Customer count: 1,000
2. Average revenue per customer: $100 x 12 (months) = $1,200
3. ARR: 1,000 x $1,200 = $1,200,000

Now, let's say that the same software company also has 500 existing customers who have each signed a two-year contract to purchase a specific piece of software for $10,000 per year. The company's CARR would be calculated as follows:

1. Committed revenue per customer: $10,000 ÷ 2 (years) = $5,000 (per year)
2. Total committed revenue: $5,000 x 500 = $2,500,000

Using ARR and CARR in Business Analysis

Evaluating Company Performance with ARR and CARR

ARR and CARR can be useful metrics for evaluating the financial performance of companies that rely on recurring revenue streams. By tracking these metrics over time, businesses can identify trends and make informed decisions about how to allocate resources in order to maximize revenue growth. ARR can provide insight into a company's overall recurring revenue streams, while CARR can provide a more accurate picture of the expected revenue in the upcoming year.

ARR and CARR in Forecasting and Budgeting

ARR and CARR can also be used to forecast and budget for the upcoming year. By taking into account the expected revenue generated by existing customers with purchase commitments or contracts, businesses can make more accurate predictions about their future revenue streams. This information can then be used to set more realistic revenue targets, allocate resources effectively and make informed decisions about business strategy.

Limitations of ARR and CARR as Metrics

While ARR and CARR can be useful metrics for businesses that rely on recurring revenue streams, it is important to note that they do have certain limitations. For example, these metrics do not take into account one-time purchases or changes in pricing or customer behavior. They also do not provide insight into factors such as customer acquisition costs or overall profitability. As with any metric, it is important to use ARR and CARR in conjunction with other financial metrics in order to get a complete picture of a company's financial health.

Conclusion

Annual Recurring Revenue (ARR) and Committed Annual Recurring Revenue (CARR) are important revenue metrics for companies that rely on recurring customer purchases. While both metrics are used to assess the financial performance of businesses with recurring revenue streams, they differ in their approach to measuring revenue. By understanding the components and calculating methods of ARR and CARR, as well as their usefulness and limitations in business analysis, companies can use these metrics to gain valuable insights into their financial performance and make informed decisions that drive growth.