For fast-growing subscription businesses, ARR is recognized as a much more informative concept than GAAP revenue -- it's what investors, acquirers, and leadership teams use to measure the growth of businesses. ARR gives a recurring business credit for where they are on an ongoing recurring basis, rather than where they've been.
For really fast-growing businesses, an extension of the ARR concept has become even more popular - Committed Annual Recurring Revenue (CARR): revenue that's booked and committed to be recurring, but hasn't started recognizing yet. CARR lets companies more accurately reflect their recurring revenue in the phase where they're closing new deals super fast.
At Subscript, we're finding that nearly 50% of the businesses we work with focus on CARR as their primary metric because it helps them better reflect how the business is growing. Why is that true?
🤔 Subscription businesses are different
Subscription businesses are valued differently than non-subscription businesses because their sales are annuities. The quality of an annuity-based business is governed by just a few factors:
- How much does it cost to acquire the customer, or "annuity"?
- How much does each customer pay - both to start, and over time?
- How long does the customer stay in place?
The ultimate summary measurement is the recurring revenue number - the size of a company's business.
🤝 Committed: recurring but sooner
Recurring Revenue is typically calculated as "$ earned from live contracts which have high odds of recurring." Committed Recurring Revenue removes the "live" part of that statement - rather than only counting contracts where the service is live and revenue is accruing, it counts contracts that have been booked (or signed) but haven't started yet.
Committed ARR shares many elements of recurring revenue vs GAAP revenue - it's all about revenue that's expected to recur, but it gets at the question of "when is the recurring revenue something the business can count on?"
Committed ARR can also be a leading indicator for account health issues; the quicker you can catch these, the better! If you wait for the churn to hit revenue, any of your diagnoses are too late and you've already lost that money.
✨ The point of recurring revenue is that it is revenue that consistently comes back month after month, year after year, and customers who commit always become recurring customers. So, it makes total sense to consider Committed Recurring Revenue as the most important number for the business.
🖥️ Should you be reporting Committed Annual Recurring Revenue?
Committed Recurring makes most sense to use when:
- 📈 Your business is growing extremely rapidly. If you are growing 100%+ YoY, then your recurring revenue may not be telling the whole story of how the business is doing if customers don't start contracts till, say, the next month. It may be better to look at committed recurring revenue to count the progress of your bookings.
- 🔜 Revenue frequently gets booked (customer signs contract) a month or two (or more) before they start using the service and their revenue starts accruing - Committed ARR will better reflect the business progress. If customers typically start their subscriptions the same month they buy, then committed will be quite close to "classical" recurring revenue and isn't worth reporting.
- 🛠️ You have good systems and processes (like Subscript!) to handle the complexities of Committed Revenue. Metrics are definitely more complex in committed land 😅 (see below for complexity considerations).
😰 What are the considerations?
Committed Revenue reporting doesn't come entirely free. There are a few complexities to watch out for:
- 🧮 While recurring revenue and GAAP revenue are often out of sync since they're different views on a business, Committed and GAAP are even more out of sync.
- ⬆️ Upsell/downsell/churn metrics are all harder to account for. Just like a customer can commit to new revenue in the future, they could also commit to an upsell or downsell for the future. The logic for this can get extremely confusing when "rolling forward" a CARR number from one period to the next.
- 🏛️ Investors and acquirers may still want to see "classical" ARR numbers and roll-forwards, to keep things more standardized. This may require yet another set of metrics to create and maintain (unless you use Subscription Intelligence software like Subscript to do that automatically).