Every month or quarter the cumulative view of all products or services sold was generally the first and most important number you would focus on. It was all fairly simple and sales/revenues/cash were in many ways interchangeable. But over the last ten years, an ever-increasing percentage of the economy has become based on a
subscription-based model.
You no longer buy the product or service; instead, you buy the right to use it for a period of time.
Take Netflix as an example. Prior to Netflix, customers purchased movies and TV box sets from a store. That store could then easily measure its sales and revenues at the end of every period. But Netflix charges $X per month for access to its whole library of content. The company can only recognize revenue once a service has been delivered so it can only add $X per subscriber per month onto its overall revenue number every month.
So actual revenues present an incomplete picture. It's clearly important for accounting purposes, but it's not the best and most forward-looking indicator for the health of the business. The introduction of MRR (monthly recurring revenue) and ARR (annual recurring revenues) addresses this issue.
ARR is the single most important metric for SaaS business because SaaS companies largely rely on future revenue. In more traditional business models, the majority of revenue is collected at the time of purchase, and retention (or repurchase rate, for e-commerce companies) makes up only a small percentage of revenue. For SaaS companies, revenue is distributed more evenly across an extended period of time.
Revenue is, by definition, backwards facing and, in the case of SaaS, it does not even do a good job of describing the past because of the waterfall nature of how subscription revenue is recognized. ARR, on the other hand, describes the present. It is a metric at a point in time. Just like the cash on the balance sheet is a number tied to a date, ARR is a number that describes the current scale of the business.
ARR is a simple and beautiful metric because it is easy to understand and provides a clear sense of scale. It is the number 1 metric that I will be evaluating 1ST Group's progress on in the quarters and years ahead.
T.E.P.
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