ARR is one of the most important metrics B2B SaaS startup leaders use when analyzing their performance and creating growth targets. It’s also the preferred metric to measure performance amongst investors.
However, growing your ARR can be difficult, especially when you’re competing against an economic downturn and a highly competitive market that’s even more competitive than usual. And even when conditions are normal, ARR can very easily stagnate or decline due to a sudden imbalance in churn and retention rates, customer acquisition costs, or a variety of other factors.
So, how do you prevent this from happening and grow your ARR so you can scale your business, fund new initiatives, and get investor interest?
In this article, we’ll explore the importance of ARR growth in measuring your business’s health, planning for the future, and attracting investor interest; as well as share 4 important tips to achieve more ARR growth.
Understand ARR growth and its impact on B2B SaaS startups
ARR, or annual recurring revenue, refers to the recurring revenue your business generates or expects to generate on a yearly basis. Here’s why ARR is important for B2B SaaS startups.
The significance of ARR growth for B2B SaaS startups
Since most B2B SaaS startups sell the bulk of their contracts in a recurring subscription model, recurring revenue makes up a significant portion of your total revenue. So, ARR is a very important metric for tracking your business’s growth, sustainability, and overall performance. It can consolidate more granular metrics and provide the most comprehensive picture on whether your business is growing, shrinking, or stagnating.
By analyzing their ARR growth rate, startups can assess their revenue performance, accurately forecast future revenues, and make informed business decisions. It provides a clear picture of how the business is progressing and allows leaders to strategically plan for expansion and optimization.
ARR is also one of the most important metrics for investors. Higher growth rates often result in higher valuations, indicating a strong growth trajectory and attracting investor interest. Conversely, stagnant or declining ARR growth can lead to lower valuations and difficulties in securing funding. Therefore, achieving and sustaining ARR growth is crucial for startups to ensure long-term success and investor confidence.
What is ARR growth rate YoY?
Your ARR growth rate, usually calculated on a Year over Year (YoY) basis, is a simple and effective way to measure ARR growth over time. This metric quantifies the percentage increase in ARR from one year to another, providing a snapshot of revenue growth or decline. By comparing your current year's ARR to the previous year's ARR, you can calculate your ARR growth rate YoY and evaluate your ARR growth over time.
How to calculate your ARR and ARR growth rate
Calculating your ARR is fairly simple: all you need to do is add up the sum of your recurring revenue over the course of the year. For more detail on how to do this and what types of revenue to include or disclude, check out this post.
To calculate your ARR growth rate, the formula is as follows:
This formula quantifies the percentage increase in ARR between two consecutive years, providing a measure of growth or decline.
For more detailed information on ARR growth rate YoY and how to calculate it, check out this post.
4 ways to accelerate ARR growth for B2B SaaS startups
Here are 4 tips for accelerating your ARR growth as a B2B startup.
1. Pay attention to unit economics
Unit economics refers to a framework for analyzing your business’s financial success by understanding the economics of your business on a per-unit level. “Per unit” may mean per customer, per deal, or per unit of the product or service you provide.
By breaking your ARR down into more granular unit economics, startups can gain important insights into which areas of their business are performing well and which ones require optimization. Startups can use unit economics to forecast profitability, develop optimization strategies, and evaluate the potential value of future solutions for their customers.
There are several unit economics metrics that are particularly relevant for tracking and growing ARR. Revenue per unit provides an understanding of the average revenue generated by each customer or unit of service and can be further divided into ARR or MRR per unit. Gross margin highlights the profitability of each unit. CAC represents the cost of acquiring each customer, and LTV or CLTV represents the expected revenue from a customer over their lifetime.
2. Forecast frequently and thoroughly
To spot trends in your ARR and act upon them in a timely manner, it’s essential to adopt a proactive approach to your finances rather than a reactive approach. One key element of this is moving away from a traditional point-in-time planning approach (typically done once per year or quarter), and instead embracing continuous planning with monthly recalibrations.
While it would be ideal to keep tabs on how all your unit economics change month over month, if you don’t have the bandwidth to do that, you can narrow it down to a few key areas. One important area that influences many other areas of performance is your cash runway. How your cash runway would change depending on market conditions or revenue projections can help you plan on whether changes in your product, cost structure, or marketing initiatives make sense. It can also inform you on whether certain recent initiatives have turned into money sinks that subtract from your ARR rather than add to it.
It’s also important to monitor factors that exist outside your company on a fairly regular basis. Rising or lowering interest rates, inflation, or fluctuations in competitor performance can lead to a decrease or increase in sales rates, retention rates, and overall performance. These can all change drastically from month to month and even week to week, so it’s essential to monitor them more closely than a quarterly or annual report.
3. Decrease CAC and increase LTV
One of the most straightforward to analyze (but tricky to execute) methods of increasing ARR is to focus on reducing customer acquisition costs (CAC) and increasing customer lifetime value (LTV). This is especially a good tactic for companies that want to optimize the value they get out of their existing system and customer pool rather than expanding to new audiences.
CAC refers to how much money it takes to acquire a customer, whether that money is spent on marketing, sales, or other expenses. If you can lower your CAC, you directly increase the ARR each customer brings. This can be done by streamlining the sales and marketing process and shaving off ineffective, costly acquisition initiatives. It could also be done by lowering the upfront cost of your product or shortening your sales cycle.
LTV, on the other hand, refers to the lifetime value your customers bring. LTV can be maximized by reducing churn and increasing conversion rates on renewals and upsells. This can be achieved by personalizing the customer experience, creating dedicated customer retention teams, addressing customer challenges promptly, and building more effective opportunities for upsells and cross-selling.
4. Grow your customer base
The final way you can increase your ARR is by growing your customer base. While existing customers provide value, there is a limit to their potential revenue contribution, and many mid-stage B2B SaaS startups usually experience a plateau when they reach this limit. To truly scale the business and increase ARR, expanding the customer base is crucial.
This can be achieved by a variety of strategies. Expanding the capabilities of your product so that it’s marketable to new audiences is the most obvious solution. However, it’s also possible to achieve with less drastic strategies. You could discover and target new customer groups that fit your original product, or change your pricing model so that it’s more accessible to a wider group of people. One way of lowering the upfront cost of your product without sacrificing total revenue is to use a B2B BNPL solution, like Capchase Pay.
Increase ARR growth with the B2B BNPL
ARR growth is vital for the success of B2B SaaS startups, as it contributes to better investor confidence, increased valuation, and the overall likelihood of business success. As startups strive to accelerate their ARR growth, it’s important to capitalize on what you already have rather than reinvent the wheel.
Capchase Pay is one great way to increase your ARR without making any changes to your product, sales, and marketing efforts, or even your pricing. By allowing customers to pay in comfortable installments while vendors get the full contract value in an upfront payment, Capchase Pay significantly reduces the financial barrier of your product without sacrificing ARR.
This makes it so you can sell to a larger customer base, accelerate your sales cycles, reduce your CAC, and a host of other benefits that improve your overall ARR.
If you want to learn more about Capchase Pay and how it can increase ARR for your B2B SaaS startup, book a demo with us now, or sign up here.
