CARR, or “committed annual recurring revenue,” is a crucial metric for SaaS businesses to track. It’s a metric that represents the total contracted recurring revenue from subscriptions over a specific period of time, including revenue that is committed but not yet billed. While annual recurring revenue (ARR) is the metric that SaaS companies tend to pay the most attention to, CARR is a critical metric to monitor since it provides a different perspective on the company’s financial performance.
To help you uncover what tracking CARR has to offer, we’ll cover everything you need to know about this key metric, including how to calculate it, why it’s important, and how it can be improved.
What is CARR?
CARR (also known as committed ARR) is a measure of a SaaS company’s total recurring revenue over a period of time, including revenue from new and existing customers, as well as revenue that it committed but not yet realized. By including all guaranteed future earnings, CARR goes a step further than ARR and paints a more holistic view of a company’s revenue potential.
For SaaS companies operating on a subscription model, CARR plays an important role when calculating the total revenue a company expects to receive when predicting its future revenue growth. This is because SaaS companies commonly charge recurring fees on either a monthly or annual basis. Customers can be committed to paying these fees even if they have not been billed yet, which is why CARR can offer a more complete picture of a SaaS company’s expected future revenue when compared to ARR alone.
CARR vs. ARR
Annual recurring revenue (ARR) and committed recurring yearly revenue (CARR) are two metrics that are similar in more ways than just their names. Both of these metrics are a calculation of a SaaS company’s recurring revenue, with the primary distinction between the two being that CARR includes revenue that is committed but not yet billed.
However, there is a significant difference regarding how these two metrics are used and the insights they provide. ARR provides a snapshot of a company’s recurring revenue at a specific point in time, and it helps provide insights into a company’s immediate revenue streams. CARR, on the other hand, offers a more forward-looking view. By including committed revenue that has yet to be realized (from sources such as annual subscription renewals, upsells, and cross-sells), CARR provides a more complete view of a SaaS company’s future earning potential.
Simply put, ARR tells you how much revenue you have coming right now so you can assess your company’s immediate, short-term financial health. In contrast, CARR tells you how much revenue you can expect in the future, so you can assess the company’s long-term stability and growth potential.
It’s worth mentioning here that ARR qualifies as GAAP revenue, while CAAR does not. This means that while CARR is a valuable metric to track, it’s not something you can report as realized revenue. Committed monthly recurring revenue (CMRR) and monthly recurring revenue (MRR) are also worth mentioning. These metrics are calculated virtually the same as their annual counterparts. The big difference is that they are calculated on a monthly basis rather than an annual basis to provide a more granular view of a company’s financial performance.
How to calculate CARR
Unlike the relatively simple formula for calculating annual recurring revenue, there is a bit of a process required to calculate CARR. To determine your SaaS company’s CARR, here are the steps you will need to follow:
Identify your total Annual Recurring Revenue (ARR): Start by adding up all of your recurring revenue from subscription-based services to calculate your ARR.
Determine the percentage or amount of ARR that is under multi-year contracts: Next, identify the portion of your ARR that stems from contracts spanning multiple years.
Take only the revenue from multi-year deals for your calculation: To calculate CARR, isolate the revenue generated from these multi-year contracts. This ensures that your calculation is based on the most stable and reliable sources of income.
Calculate the total contract value of those multi-year deals: For each multi-year contract, calculate the total value of the commitment. This includes all fees, charges, and other revenue associated with the contract over its entire duration.
Add up the total contract values from all your multi-year deals: Add the total contract value of each multi-year contract to arrive at an aggregate value of all your long-term commitments.
Calculate the annual value of those deals: To find the annual contract value (ACV) of your multi-year deals, divide the total contract value by the average contract length. This will leave you with a clear representation of the yearly revenue derived from each multi-year contract.
Once you’ve completed all these steps, you will have calculated your company's committed annual recurring revenue.
How other SaaS metrics impact CARR
CARR is a metric that can be heavily impacted by a number of other SaaS metrics. If you are attempting to determine your company’s future revenue, understanding the relationship between CARR and these other metrics is an important place to start. With that in mind, here are the additional SaaS metrics you should be tracking and how they impact CARR:
New multi-year bookings increase CARR
Attracting new customers is the most straightforward way to grow a company’s CARR. When a new customer signs a multi-year contract, this adds to the committed revenue that is locked in but not yet billed for. Generating new bookings is an important goal for startups looking to secure long-term revenue, offset customer acquisition costs, and increase future revenue growth.
Renewals can convert ARR to CARR
Customer renewals also have a significant impact on your CARR. Specifically, when customers renew their annual contracts, that revenue is then recognized as committed revenue until it is billed for and recognized under GAAP.
Renewal rates impact future CARR
The renewal rate of annual contracts directly influences the trajectory of CARR growth since a higher renewal rate signifies a greater conversion of ARR to CARR each year. Monitoring and increasing SaaS renewal rates should be a priority for any SaaS business aiming to generate greater CARR.
Churn and downgrades reduce CARR
When multi-year customers cancel before the end of their signed contracts, this reduces CARR as that committed future revenue is then lost. This makes it important for SaaS businesses to monitor their churn rates and really focus on improving their customer retention to avoid any lost CARR.
Expansions and upgrades extend CARR
When existing multi-year contracts are expanded or upgraded, their contribution to a company’s CARR increases. This means that focusing on encouraging customers to upgrade or expand their existing contracts is an excellent strategy for any CFO or revenue leader wanting to grow the company’s committed future revenue.
Why CARR and CMRR are critical metrics in SaaS
CARR (as well as committed monthly recurring revenue for companies offering monthly subscriptions) is a crucial KPI to track. Understanding CARR helps SaaS companies reliably predict their future revenue. Meanwhile, Working to boost CAAR can improve a company’s revenue stability and total valuation.
Here’s a further breakdown of the reasons why CARR and CMRR are key performance indicators for SaaS companies:
CARR and CMRR correlate with revenue stability: CARR and CMRR are key indicators of a company’s revenue stability; when a company has a predictable stream of committed revenue, it can forecast future revenue more easily and better prepare for impending market fluctuations or downturns.
Committed future revenue results in higher valuation multiples: SaaS companies with high CARR and CMRR are more likely to command higher valuation multiples from investors. This is because high CARR and CMRR signify a solid customer base, reducing perceived risk and validating a company’s product/market fit in the eyes of investors.
Higher CARR suggests lower churn risk for investors: Speaking of perceived risk, a high CARR lets investors know that a company will likely maintain a low churn rate. This signals that a company has successfully retained its customer base, indicating a level of satisfaction with the product and making it more attractive to potential investors.
CARR and CMRR help predict future revenue: Analyzing the committed revenue from existing customers allows SaaS companies to accurately predict their future revenue. This ability to forecast future revenue is key when it comes to resource allocation and financial planning.
How to improve your CARR
For subscription businesses, improving CARR is a high-priority goal. From increasing revenue stability to making the company more appealing to investors, there are plenty of reasons why SaaS companies should focus on growing their CARR. If you would like to lock in more committed revenue, here are three proven strategies for increasing CARR in a SaaS business:
1. Focus on landing longer-term contracts
Long-term contracts boost CARR more than short-term contracts because they represent committed revenue over a longer period of time. There are a number of ways for SaaS companies to increase their likelihood of landing longer-term contracts. Ensuring an excellent customer experience via a streamlined onboarding process and support from an experienced customer success team is one way to instill the confidence customers need to commit to a long-term contract. You can also develop tailored offerings and create pricing packages designed to incentivize customers to commit to lengthier contracts.
Prioritizing these long-term contracts can quickly grow a SaaS company’s CARR. It’s also able to improve a company’s revenue efficiency, ensuring they can extract as much value as possible from each customer they acquire.
2. Provide customer incentives for multi-year deals
As mentioned earlier, providing incentives for customers to sign multi-year deals is one of the most effective ways to land more long-term contracts and improve a company’s CARR. These incentives can take several different forms, including special discounts and access to exclusive features or services.
Once you’ve chosen the customer incentives you would like to offer, be sure to highlight them throughout your sales and marketing efforts. It can also help to offer customers a certain degree of flexibility when choosing their contract by allowing them to customize the contract terms to their budget and needs.
3. Upsell customers to extend contract length
Focusing on upselling customers can improve your company’s CARR by optimizing the value of each new customer you acquire. You can upsell customers to extend the length of their contract by highlighting the incentives of long-term contracts, or you can upsell customers by offering them product and feature upgrades that are aligned with their needs. Either way, working to maximize the value of each new contract via upsells is a powerful way to grow CARR without needing to acquire new logos.
Lock in future customer contracts with Maxio
Tracking and optimizing your company’s CARR ensures revenue stability and increases the likelihood of a higher valuation from potential investors—but you need to have the right software to accurately track this valuable metric.
With Maxio, SaaS businesses can track and monitor their SaaS metrics and analytics in real-time, including CARR, CMRR, and a whole host of other key SaaS metrics. To learn more about the other important SaaS metrics that you can monitor with Maxio, be sure to check out Maxio’s SaaSpedia—a comprehensive financial encyclopedia of key SaaS terms, metrics, and KPIs.