What is MRR? 5 steps to optimize ARR and MRR to help companies maximize profits

I. What is ARR and MRR? 

ARR is an abbreviation of the phrase Annual recurring revenue, which means Annual recurring revenue in Vietnamese.  ARR is understood as the total amount of money expected to be earned by the company within a year.  ARR is a number that companies can completely predict because of its stable nature.

So what is MRR?  As we know to get annual revenue, companies need to measure from a smaller unit called Monthly Recurring Revenue, or MRR (Monthly recurring revenue).

In business monitoring and evaluation, the determination of monthly and yearly revenue helps company managers/CEOs to grasp the effectiveness and quality of company strategies that businesses are applying, from  that has an overview and make appropriate decisions to develop strategy.

Currently, most companies apply monthly and annual revenue measurement to evaluate business performance.  Maybe next is the Saas software company or the Subscription Business Model (operating on a subscription model).

II. 3 reasons businesses need to measure MRR and ARR

After learning what ARR and MRR are, one question arises why is it necessary to measure these indicators in companies activities?  Here are three specific reasons:

-Enterprises calculate ARR and MRR indexes to assess the overall growth rate

Recurring revenue by month and recurring revenue by year are the two most optimal measures for the growth of a companies because of its stability and especially its ability to predict the company situation.

When setting the ARR and MRR indexes within a few months, a few years to compare, managers and leaders will answer the question whether the business strategy being applied is on the right track?

-ARR and MRR help businesses measure the effectiveness of their company models

As mentioned above, for companies that do business in the form of registration to use or provide software services, ARR and MRR are two effective supporting indicators when managers want to evaluate efficiency and effectiveness. The quality of the business model we are applying.  If the efficiency is not high, it means that the model is not suitable and the company needs to deploy in a different direction.

-ARR and MRR help businesses predict profit effectively

Not only stopping at helping businesses evaluate the effectiveness of business strategies, the periodic revenue index also helps managers make almost accurate profit predictions.

Specifically, businesses can capture their sales revenue in a certain period of time.  Then, taking that revenue minus the total cost, will get monthly profit or annual profit.

III. Revealing 5 ways to optimize MRR and ARR effectively for companies

In fact, there are many methods to help companies optimize recurring revenue.  However, not all companies have the necessary and sufficient conditions to implement all those methods.

The 5 ways to optimize recurring revenue shared below are the 5 most popular and most feasible ways for all company models. Therefore, administrators can choose and implement the way that best suits their company.

1. Reduce the cost of CAC

CAC stands for Customer Acquisition Cost.  This is the amount of money that the company must invest and pay the necessary amounts to get a customer.

In marketing and company operations, CAC is also an equally important indicator to evaluate and measure the quality of implementation of companies and marketing campaigns.

Customer ownership costs include things like:

-Payments for advertising, marketing and sales activities

-Software investment costs for marketing campaigns

-Expenses for printing, social networks, newspapers, ..

-Support for staff

-Cost of venue rental, invited speakers, logistics to organize the event (if necessary)

Reducing customer ownership costs is considered the most effective way to optimize recurring revenue when this cost reduction is completely under the control of the company.

To do this, companies need to invest more in the expertise of their employees instead of spending too much on promotion.  Because, building and maintaining relationships with customers is a necessary skill of the sales team and the marketing team is responsible for attracting customers.  When companies can make optimal use of resources and develop Inbound Marketing in the right direction, the cost of customer ownership will certainly decrease significantly.

2. Find ways to increase average order value

Average order value is also known as AOV (Average Order Value).  This is the average amount a customer has to pay in each transaction with a business such as buying and selling, signing a contract, registering for a service package, etc.

Finding ways to increase the average value of an order means that companies need to have ingenious methods to motivate customers to buy / sign up for higher priced products / service packages or convince them to buy more many products or register for more service packages in one transaction.

Since then, the monthly and annual revenue has also improved, the increase in AOV has a direct impact on the optimization of ARR and MRR indexes.

3. Optimizing customer lifetime value (CLV)

In company, there is a term to refer to the time of attachment and the value customers bring to the business during the time of attachment, which is Customer Lifetime Value (CLV).  This is also the next indicator that companies can apply to optimize ARR and MRR.

CLV is an indicator that measures the total value that a company achieves by building and maintaining mutually beneficial relationships with its longtime customers.  Current reality shows that many businesses are so focused on attracting new customers that they forget that it is long-term loyal customers who create long-term value for their companies.

Optimizing customer lifetime value plays an important role and is quite easy to do.  Because for these customers, companies do not need to spend too much money on product promotion or marketing to attract.  They have used and stick with it for a long time, so as long as companies can build trust and bring sustainable benefits, the value these customers create is great.

From that, it can be seen that, if the number of long-term customers is larger, companies increase their ability to optimize recurring revenue while still being able to save costs.

4. Make the most of Upsell and Cross-selling

Upselling and cross-selling are two effective forms of increasing revenue, frequently applied by the sales team of many large enterprises.

Upsell (additional sale) is the use of incentives, advice to encourage customers to buy an additional product or register for another service package of equal or greater value than previously purchased.

For example:

Encourage customers to sign up for a software solution with a higher-priced feature pack that is on special offer and includes more features.

Cross-Selling (cross-selling) is to encourage customers in addition to buying the original product to buy other products/services related to the original product based on the needs set by the customer and the advice of the customer.  sell.

When customers tend to buy more or cross-purchase products/services, the order value will definitely increase and the recurring revenue will also be optimized.

5. Applying technology to optimize sales activities

Today, with the rapid development of technology and the trend of interference between digital technology and business models in all fields from fashion, cuisine to construction, the application of software solutions with  the purpose of business optimization is a popular and wise choice.

Instead of having to keep customer records and track business performance manually, inaccurately and stereotyped like before, now thanks to CRM sales management software, sales teams have made full use of their potential.  customer capabilities, optimize the customer care and consulting process, evaluate and improve business strategies to effectively boost revenue.

Through the above article, we hope that the most basic information such as what ARR and MRR are, the formula for calculating periodic revenue indicators and the most effective revenue optimization methods have been fully conveyed.  sufficient and easy to understand.