How To Calculate Cost of Annual Recurring Revenue in Freshbooks | Arithmix

Calculating the cost of annual recurring revenue is an important metric for any business that relies on recurring revenue streams. It helps you understand the true cost of acquiring and retaining customers, and can help you make informed decisions about pricing, marketing, and customer retention strategies. In this article, we'll explore what annual recurring revenue is, when it's valuable to calculate the cost of annual recurring revenue, and how to calculate it.

What Is Cost of Annual Recurring Revenue?

Annual recurring revenue (ARR) is the amount of revenue a business expects to receive from its customers on an annual basis. It's a key metric for subscription-based businesses, as it helps you understand the total value of your customer base. The cost of annual recurring revenue (CARR) is the cost of acquiring and retaining those customers over the course of a year. This includes marketing and sales expenses, as well as the cost of providing ongoing support and service to your customers.

Calculating CARR is important because it helps you understand the true cost of your revenue streams. For example, if your CARR is higher than your ARR, it means that you're spending more money acquiring and retaining customers than you're making from them. This could indicate that your pricing is too low, or that your marketing and sales strategies need to be revised.

When Is It Valuable To Calculate Cost of Annual Recurring Revenue?

Calculating CARR is valuable for any business that relies on recurring revenue streams, but it's particularly important for subscription-based businesses. If you're running a SaaS (software as a service) business, for example, you need to understand the true cost of acquiring and retaining customers in order to make informed decisions about pricing and marketing. Similarly, if you're running a membership-based business, you need to understand the true cost of providing ongoing support and service to your members.

Calculating CARR is also valuable if you're looking to raise funding or sell your business. Investors and potential buyers will want to see that you have a solid understanding of your revenue streams and the costs associated with them. Being able to demonstrate a strong CARR can help you secure funding or get a better valuation for your business.

How to Calculate Cost of Annual Recurring Revenue

Calculating CARR involves adding up all of the costs associated with acquiring and retaining customers over the course of a year. This includes marketing and sales expenses, as well as the cost of providing ongoing support and service to your customers. To calculate CARR, follow these steps:

1. Calculate your total revenue for the year
2. Calculate your customer acquisition cost (CAC) by dividing your total marketing and sales expenses by the number of new customers acquired during the year
3. Calculate your customer retention cost (CRC) by dividing your total support and service expenses by the number of customers retained during the year
4. Add your CAC and CRC together to get your total CARR

Once you have calculated your CARR, you can use it to make informed decisions about pricing, marketing, and customer retention strategies. For example, if your CARR is higher than your ARR, you may need to revise your pricing or marketing strategies to reduce your customer acquisition costs. Alternatively, if your CARR is lower than your ARR, you may want to invest more in customer retention strategies to reduce your customer retention costs.

Overall, calculating the cost of annual recurring revenue is an important metric for any business that relies on recurring revenue streams. It helps you understand the true cost of acquiring and retaining customers, and can help you make informed decisions about pricing, marketing, and customer retention strategies.

How Do You Calculate Cost of Annual Recurring Revenue in Freshbooks

Freshbooks itself isn’t naturally geared towards letting you calculate complex metrics like Cost of Annual Recurring Revenue. As an alternative, teams typically use products like Arithmix to import data from Freshbooks and build out dashboards.

What is Arithmix?

Arithmix is the next generation spreadsheet - a collaborative, web-based platform for working with numbers that’s powerful yet easy to use. With Arithmix you can import data from systems like Freshbooks, combine it with data from other systems, and create calculations like Cost of Annual Recurring Revenue.

In Arithmix, data is organized into Tables and referenced by name, not by cell location like a spreadsheet, simplifying calculation creation. Data and calculations can be shared with others and re-used like building blocks, vastly streamlining analysis, model building, and reporting in a highly scalable and easy to maintain platform. Data can be edited, categorized (by dimensions) and freely pivoted. Calculations are automatically copied across a dimension - eliminating copy and paste of formulas.

Arithmix is fully collaborative, giving your entire team access to your numbers and the ability to work together seamlessly.

Calculating Cost of Annual Recurring Revenue in Arithmix

Calculating metrics like Cost of Annual Recurring Revenue is simple in Arithmix. Once you've created your free account, you’ll be able to import your Freshbooks data, and use it to create natural language formulas for metrics like Cost of Annual Recurring Revenue.

Arithmix is designed to give you the power to build any calculations you want on top of your Freshbooks data, while also being easy to use and collaborate on. You can share your dashboards with users inside and outside of your organisation, making it easy to empower your whole team.