What is ARR?
Annual Recurring Revenue (ARR) is a crucial metric in businesses, it’s most applicable to subscription-based companies and services which provide software services.
ARR is the annual revenue generated from the existing customer base of a startup with a subscription method. Measuring and monitoring ARR helps you manage your money and keep careful track of it at the same time. It’s a simple system but the details that can be discovered within it are invaluable.
It is best expressed as a formula:
ARR = (Overall Subscription Cost Per Year + Recurring Revenue From Add-ons or Upgrades) - Revenue Lost from Cancellations
In even simpler terms it's expressed as ARR = average annual profit / average investment.
This is a guest submission by John Brody of Wellybox.com.
Automation in ARR
“Automation is the use of largely automatic equipment in a system of manufacturing or another production process” is Webster's definition. In the modern times, automation has moved from the production line over to the software world.
Entrepreneurs face constant unexpected challenges at almost every business level: delays in operation, the delegation of work, financial management, and resource management.
Despite workflow processes being flexible and straightforward, many new startups can’t handle keeping track of their Annual Recurring Revenue (ARR). Tracking ARR allows tech companies a way to measure their year over year financials at a quick glance. Having a metric with which to monitor your business is invaluable to a business as it is starting up.
Startups are a difficult world to succeed in. While a rare few startups actually do make it into the realm of what is often referred to as unicorns, businesses worth more than a billion dollars, it is important to be aware of your odds going in.
Many entrepreneurs start the journey but only a few manage to reach the finish line.
In 2019, the failure rate of startups was around 90%. Research shows that 21.5% of startups fail in the first year, 30% in the second year, 50% in the fifth year, and 70% in their 10th year. Even surviving past your first decade may not be enough as sometimes unexpected things can occur, so it’s important to have realistic expectations of what you are setting out to do.
The reduction in manual tasks like admin work or book-keeping enables founders to free up their time for experimentation, development, and building deeper relationships with customers.
How can automation increase startups’ ARR?
Automating tasks can be a great way to streamline operations. It allows you to address customers’ problems at scale without expending as many resources and helps improve your customer service. It also removes the likelihood of human error and frees you up to focus on other things.
Several functional and operational factors influence a startup’s growth rate, but automation resolves many of them:
- Automation helps gather, collate and interpret the data from the customers to improve understanding of their specific needs and wants. You learn what sells and what doesn’t, who buys what items and who doesn’t and what items are returned or reviewed most often.
- Automated data interpretation helps improve the quality of your product by focusing on the areas you wish to improve most. Once You have a better idea of what your clients want you can better supply it to them.
- Startups are more adaptive and agile through automation. As a result, they can stay ahead of trends and become competitive in the market. That agility allows you to change your business more easily to adapt to changes that happen around you.
An example of automation is using advanced AI to manage your finances and generate expense reports. Not only does it save time, and money but it is also more accurate. This accuracy can sometimes be the difference between squeezing by and blowing a budget.
5 Ways Automation Can Increase ARR
Automation has several benefits that can help increase a startup’s ARR, and a few of them are:
1. Cost Reduction
Automation will help your company by reducing the overhead cost of manual tasks. Automation also allows a startup to offer a more consistent and seamless customer experience that improves customer retention in the long run.
Besides, automation helps you keep track of company's financial data to avoid costly mistakes. For instance, if you're using QuickBooks, you can setup QuickBooks to Google Sheets integration, gather all the data in one place and use for financial reporting and analysis.
Automation platforms can be a company’s number one weapon in streamlining its process and systems. Any thriving startup aims to tailor its workflow, apps, and services to meet the demand. However, this often results in a messy bundle of processes scattered across many platforms.
3. Centralized Communication
Automation helps streamline the communication between various sections and departments of the startup. It reduces the pressure of segregating data or locating it later across multiple systems. Automation is significant in providing accurate, up-to-date information to the users and staff alike, without facing any technical delays.
4. Enhanced Visibility
Automation tools can present data in a way that brings strategic insights for startup leaders. The software allows managers to access information about what’s going on at the company level and navigate challenges faced by their team members. Automation makes it simpler to view how the business is performing while figuring out the performance of each team member.
5. Reduces Errors
Imagine you have to repeat a set of tasks every time to deliver the optimum service to clients. Duplicity and repeatability are one of the significant advantages of automation.
5 Ways to Increase ARR
1. Working with the Right People
While it may seem supremely simple and obvious, hiring and working with the right talent scales a business’ growth like nothing else. It is essential to recruit employees that align with the startup’s culture and ethics to drive growth.
2. Freemium Plans
In an age when the start-up market is somewhat saturated, implementing newer growth strategies like offering a freemium can significantly boost the sales in a start-up. Allowing users to use and explore a particular service or a product before prompting them to pay upfront is becoming one of the commonly used strategies. This method builds a degree of trust amongst the customers while leading them to dependency on the product—consequently, this dependency and reliability of the service prompt the customers to pay for the subscription regularly.
A significant growth strategy to boost ARR is to upsell products and services. Many startups upsell premium features and tools to their customers at a higher monthly rate or one-time fee.
4. Prioritizing Existing Customers
Focusing on the revenue that’s already in your pocket will help reduce churn. By working on requested features or improving the quality of existing features that the customers widely use, a startup can significantly boost its ARR.
It is also advisable to build products or modify tools based on feedback from existing customers. Tailoring your product according to their needs will allow you to build brand equity and increase ARR in one fell swoop. However, it is also essential to be mindful of not spending all the resources on satisfying one big customer or creating a product that isn’t scalable.
5. Focus on Human Experience
While scaling a startup is the most critical component in leading it to success, it is also essential to value the human resource experience in the business. Employees are equally crucial in delivering an exceptional customer experience, even in an automated work environment.
Automation platforms only help smoothen the workflow, but human resources solve the problems and issues in the business.
Getting the Most of ARR Tracking
Automation platforms and systems offer several solutions and workflow to increase startups’ ARR. A few of them that bring a significant change to the working of your startup may be:
1. Customer Support Chatbots
Customer retention is one of the key factors in boosting ARR for a startup. One way to offer seamless and prompt customer service is to implement a customer support chatbot. While it may seem simplistic and a fairly used-up approach, a customer service chatbot significantly helps in strengthening a startup’s customer experience.
While using or integrating a chatbot in your services, make sure that it is easily accessible and visible to the customer.
2. Customer Engagement
It is essential to know your customer base to increase the scalability of your startup and increase revenue. Most businesses and companies employ surveys, polls, questionnaires to collect data and interpret it to improve their product. However, automation tools can also simplify the process of arriving at the results more quickly and efficiently. Every budding startup benefits from learning about their customer base, its preferences, and experiences to help it increase ARR.
3. Curated News and Market Insights
Increasing ARR for a startup might become a daunting task if they are behind the market trends and not updated with the industry insights in real-time. The limited number of hours of the day and the endless tasks make it difficult to be on top of everything.
Automation can curate the latest news and industry insights to be ahead in your game while saving time browsing and segregating essential insights from the fluff.