What is CARR? Committed annual recurring revenue explained

Did you know that high-growth SaaS companies often prioritize CARR over traditional metrics like ARR? That's because CARR provides a more accurate view of future recurring revenue, which is essential for making informed business decisions and securing investments.

In this article, we'll explore the ins and outs of CARR. We’ll break down what it is, why it matters, and how to calculate and improve it.

You'll also learn:

• How to calculate CARR accurately
• Strategies to improve your CARR
• The difference between CARR and ARR
• Why SaaS companies rely on CARR
• How Orb's billing platform can optimize your CARR

Let’s begin by explaining what CARR is in SaaS.

What is CARR?

Committed Annual Recurring Revenue (CARR) is a key metric used by subscription-based businesses, particularly in the SaaS industry. It’s used to measure the annualized revenue from all committed contracts, even if those contracts haven't started generating revenue yet.

Think of it as a way to peek into the future of your recurring revenue stream.

What is CARR in simpler terms?

It's like a crystal ball for your business's recurring revenue. Instead of just looking at the revenue you're currently generating, CARR takes into account future commitments from customers.

This includes new customers who have signed contracts but haven't started their subscriptions yet, existing customers who have renewed their contracts, and even upsells or expansions that will happen down the line.

Why is this important?

In CARR finance, businesses are often valued based on their recurring revenue. CARR provides a more accurate and complete picture of a company's future revenue potential. This is especially true when it is compared to traditional metrics like ARR (Annual Recurring Revenue).

Incorporating CARR into your financial analysis is a good first step. By taking it into account, you can gain a deeper understanding of your company's true growth trajectory. We’ll talk about CARR in SaaS in the following section.

Why SaaS companies use CARR as a key metric

CARR has quickly become a vital sign for SaaS businesses. But what is CARR really doing for these companies? It’s vital because CARR:

• Provides a clear view of future revenue. It’s a stark contrast from traditional revenue metrics that only show what's already been earned. CARR includes committed revenue from signed contracts, even if the service hasn't started yet.
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• Helps with forecasting and budgeting. By providing insights into future revenue streams, CARR allows businesses to create more accurate financial forecasts and budgets.
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• Offers a leading indicator of account health. Changes in CARR can signal potential churn risks or growth opportunities. For example, a slowdown in CARR growth might indicate that it's time to focus on customer retention efforts.
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• Facilitates better decision-making. CARR provides a deeper understanding of future revenue potential. Leadership teams can make more strategic decisions about product development, marketing campaigns, and overall business strategy.
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• Boosts investor confidence. High CARR growth indicates a strong and predictable revenue stream. This predictability can increase investor confidence and attract funding.
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• Provides a more dynamic view of revenue. ARR only shows revenue from active subscriptions. CARR offers a more dynamic and forward-looking perspective by including upcoming revenue from signed contracts.

Components of CARR

To fully grasp what CARR is, it's important to understand its building blocks. Here's a closer look at the key components that make up this vital SaaS metric:

• Signed contracts: This is the foundation of CARR. It includes the annualized revenue from all signed customer contracts, regardless of whether the service has started or billing has begun.
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• Upgrades and expansions: As your customers grow and their needs evolve, they might upgrade their subscription levels. CARR accounts for these changes, reflecting the increased revenue commitment from those happy and successful customers.
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• Churned contracts (excluded): Just as CARR includes future revenue increases, it also accounts for expected decreases. Contracts that are not renewed or are canceled are excluded from the CARR calculation.

This exclusion ensures that your CARR reflects a realistic picture of your future recurring revenue, taking into account the natural ebb and flow of customer lifecycles.

CARR vs. ARR: What’s the difference?

Both CARR and ARR provide valuable insights into a SaaS company's recurring revenue, but they offer distinct perspectives. Understanding the difference between these two metrics is key.

Let’s explain how they’re different:

A snapshot vs. a crystal ball

ARR, or Annual Recurring Revenue, is like a snapshot of your current revenue stream. It measures the recurring revenue generated from active subscriptions at a specific point in time.

Think of it as the revenue you're currently bringing in from customers who are actively using your service. It gives you a clear picture of your current financial standing with regard to recurring revenue.

CARR takes a more forward-looking approach. It encompasses contracted annual recurring revenue. It also includes revenue from signed contracts that haven't started generating revenue yet. However, CARR excludes one-time fees and non-recurring components.

CARR includes future commitments from new customers, renewals from existing customers, and sometimes, even planned upgrades or expansions. It's like having a crystal ball that allows you to see the future of your recurring revenue stream.

The timing makes all the difference

The key distinction lies in the timing of revenue recognition. ARR only counts revenue that is already being generated. CARR includes revenue that is committed but not yet billed.

That’s why CARR is considered a more dynamic metric. This is especially true for SaaS companies with long sales cycles where there might be a delay between closing a deal and recognizing the revenue.

To put it simply, ARR tells you how much recurring revenue you have today. CARR gives you a glimpse into how much recurring revenue you can expect to have in the future.

How to calculate CARR

Now that you have a good grasp of what CARR is, let's dive into the practical side. How do you actually calculate it? While it might seem a bit complicated at first, it's actually a simple process. Before sharing each step, let’s look at the formula.

The formula

Here’s what the formula looks like:

CARR = (Current ARR) + (New Contracts ARR) + (Expansion ARR) - (Churned ARR)

Now, let's break down each step in calculating CARR.

Step 1: Start with your current ARR

Begin by calculating your current ARR. This is the recurring revenue generated from all your active subscriptions at this very moment. Remember, ARR only includes revenue from customers who are actively using your service and paying for it right now.

Step 2: Add in new contracts

Next, add the annualized value of any new contracts you've signed. Do so even if those customers haven't started using your service or paying you yet. This is a key differentiator between CARR and ARR. Remember, CARR takes into account future revenue commitments.

Step 3: Include upcoming expansions and upgrades

If you have existing customers who have committed to expanding their subscriptions or upgrading to higher-priced plans in the future, make sure to include that projected increase in revenue as well.

Step 4: Subtract churned or downgraded contracts

It's important to be realistic about your future revenue projections. Subtract the annualized value of any contracts that are expected to churn or be downgraded. This step confirms that your CARR calculation reflects a balanced and accurate view of your future recurring revenue.

Step 5: Exclude one-time fees

Remember that CARR focuses solely on recurring revenue. Don't include any one-time fees or professional services revenue in your calculation. These are not considered part of your predictable, ongoing revenue stream.

How to improve your CARR

Understanding what CARR is takes time, and this is just the first step. The real magic happens when you actively work to improve it. A higher CARR means a more predictable and robust revenue stream, which is key for any SaaS business. Here are some proven strategies to boost your CARR:

• Accelerate sales cycles: Time is of the essence when it comes to CARR. By shortening your sales cycle and driving faster contract closures, you can increase the volume of committed contracts and, in turn, your CARR.
  
  Focus on streamlining your sales process and removing bottlenecks. This way, you’ll be empowering your sales team to close deals efficiently.
  
• Focus on Expansions: Your existing customers are a goldmine of opportunity. Develop effective strategies to upsell and cross-sell to your current customer base.
  
  Identify their evolving needs and offer tailored solutions. You want to encourage them to upgrade their subscriptions or expand their usage of your service.
• Prioritize customer success: Reduce churn risk in your contracted accounts by investing in onboarding and customer success.
  
  Make sure that new customers have a smooth and positive experience with your product from day one. Proactive support and ongoing engagement can help prevent cancellations and foster long-term loyalty.
• Offer flexible pricing: Implement pricing models that support easy upgrades and multi-year commitments. Tiered pricing, usage-based options, and discounts for longer-term contracts can incentivize customers to commit.
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• Land longer-term contracts: Encourage customers to commit to longer-term contracts by offering attractive incentives. Think discounts or exclusive features. Longer contracts provide greater revenue predictability and contribute to your CARR.

Orb’s billing system can help keep your company’s CARR healthy

We've explained what CARR is and why it's such a vital metric for SaaS businesses. However, accurately measuring and improving your CARR requires more than just understanding the concept.

You need a robust billing platform that can help you bill users accurately, implement diverse pricing models, and gain deep insights into your revenue streams.

This is where Orbcomes in.

Orb is a done-for-you billing platform. With Orb, you can not only implement any revenue model you desire, but also gain the visibility and control you need to keep your CARR healthy and growing.

Here's how Orb can help you achieve a strong and predictable CARR:

• Accurate usage tracking: Orb's advanced metering infrastructure guarantees that every billable event is tracked with precision. Orb helps eliminate billing disputes, build trust with your customers, and confirm your CARR calculations are based on data.
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• Flexible pricing models: Orb allows you to create and evolve your pricing strategy with ease. Implement any pricing model you wish to incentivize longer-term contracts and encourage upgrades, ultimately boosting your CARR.
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• Data-driven insights: Orb provides detailed reports and granular insights into your revenue and customer behavior. This data allows you to pinpoint churn risks, proactively address customer needs, and make informed decisions to optimize your CARR.
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• Integrations: Orb integrates with popular data warehouses and accounting software. We streamline your billing operations and help reduce the risk of errors. Orb helps ensure that your CARR calculations are based on reliable and up-to-date information.
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• Customized billing solutions: With Orb's intuitive and custom SQL editor, you can define your own usage metrics and tailor your pricing models to match your business needs. Customization lets you improve your pricing strategy for maximum CARR growth.

Ready to let Orb help you keep your company’s CARR healthy? Consult our flexible pricing options to find a plan that perfectly aligns with your business needs.