How To Calculate Cost of Annual Recurring Revenue in NetSuite ERP | Arithmix

Calculating the cost of annual recurring revenue (ARR) is an important task for any business. It helps you understand the true value of your customer base and can inform decisions about pricing, marketing, and sales strategies. In this article, we'll explore what ARR is, when it's valuable to calculate, and how to calculate it.

What Is Cost of Annual Recurring Revenue?

Annual recurring revenue (ARR) is a metric that measures the predictable and recurring revenue generated by a business's customers over a year. It's calculated by multiplying the average monthly recurring revenue (MRR) by 12. For example, if a business has an average MRR of $1,000, its ARR would be $12,000.

The cost of ARR, on the other hand, is the amount of money a business spends to acquire and retain its customers over a year. This includes marketing and sales expenses, as well as the cost of providing customer support and maintaining the product or service. By subtracting the cost of ARR from the total ARR, a business can determine its net ARR.

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

Calculating the cost of ARR is particularly valuable for businesses that rely on recurring revenue models, such as subscription-based services or software as a service (SaaS) companies. It can help these businesses understand the true value of their customer base and identify areas where they can improve efficiency and profitability.

For example, if a business has a high cost of ARR relative to its net ARR, it may need to reevaluate its pricing strategy or marketing tactics. Alternatively, if a business has a low cost of ARR relative to its net ARR, it may be able to invest more in customer acquisition and retention to further grow its revenue.

How to Calculate Cost of Annual Recurring Revenue

To calculate the cost of ARR, a business needs to determine all of the expenses associated with acquiring and retaining its customers over a year. This includes marketing and sales expenses, such as advertising, lead generation, and sales commissions, as well as the cost of providing customer support and maintaining the product or service.

Once these expenses have been identified, they can be added together to determine the total cost of ARR. This number can then be subtracted from the total ARR to determine the net ARR.

It's important to note that the cost of ARR can vary significantly depending on the industry and business model. For example, a SaaS company may have a higher cost of ARR due to the need for ongoing product development and customer support, while a subscription-based service may have a lower cost of ARR due to lower customer acquisition costs.

In conclusion, calculating the cost of annual recurring revenue is an important task for businesses that rely on recurring revenue models. By understanding the true value of their customer base and identifying areas for improvement, businesses can optimize their pricing, marketing, and sales strategies to drive growth and profitability.

How Do You Calculate Cost of Annual Recurring Revenue in NetSuite ERP

NetSuite ERP 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 NetSuite ERP 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 NetSuite ERP, 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 NetSuite ERP 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 NetSuite ERP 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.