CARR vs. ARR: Main Differences, Formulas & Key Metrics

As the subscription business model becomes more popular, business owners are looking for accurate and reliable ways to track business growth. Two of the most common metrics include Committed Annual Recurring Revenue (CARR) and Annual Recurring Revenue (ARR). The two are similar, which can cause confusion.

Below, we’ll explore the differences between CARR vs. ARR and how you can use both to get insights into customer counts, revenue forecasting, and churn rates. Plus, learn more about how Revolv3 can help you improve your ARR with an optimized payment system.

What Is CARR?

Committed Annual Recurring Revenue (CARR), also sometimes used synonymously with Annual Run Rate, is the total of all committed or contracted revenue for a business. It includes all revenue that has already been earned as well as customer contracts that have been signed for future sales.

Subscription businesses can use CARR to evaluate their recurring revenue for upcoming subscription periods. For example, if you offer an annual subscription, your CARR might include clients who have a current agreement to automatically renew their subscription. If those customers churn (or cancel their subscriptions) sometime during their current period, this is also accounted for by deducting their canceled subscription payment from your CARR.

CARR Formula and Components

CARR is calculated by adding together the revenue you receive from subscriptions each year and revenue from signed contracts. Then, you must subtract your expected churn.

If you have multiple subscription tiers, calculate it by adding current subscription revenue and expected new subscriptions. Then, you can add expected upsells (or other expansion revenue such as add-ons) and subtract expected downsells.

The two formulas look like this:

• CARR = ARR + Signed Contracts - Expected Churn
• CARR = ARR + New Subscriptions + Expected Upsells - Expected Downsells - Expected Churn

How Does CARR Reflect the Pace of Acquiring New Customers?

CARR can be beneficial for fast-growing subscription businesses that want an accurate view of their future revenue. While CARR gives a great look at current customers and their renewing contracts, it also takes into account new customers.

Even if a customer’s subscription hasn’t started, the revenue is added to your CARR because they have signed the contract to begin at a future date. Therefore, CARR offers a representation of how many new customers you are taking on during a set period. The more your customer base grows, the higher your CARR will be.

What Is ARR?

Annual Recurring Revenue (ARR) is the total of all revenue expected from active users and contracts in the next year. Subscription businesses would include current subscribers that may be renewing their subscriptions within the next 12 months.

What is the difference between CARR and ARR?

ARR differs from CARR in that it doesn’t include revenue from new customers. For example, if you have a current customer whose annual contract will renew in a month, this would be included in ARR and CARR. However, a new customer who signs a contract to begin on the same day or someday in the future would only be included in CARR.

ARR Formula and Factors Affecting ARR

You can calculate ARR by adding together the annual value of your current subscriptions. If you only offer annual contracts, the formula is simple: just add together the subscription fee for each user. However, if you have multi-year subscriptions, you’ll need to calculate how much the annual value is for each type of subscription.

For example, an annual contract for $250 has an annual value of $250. However, if you offer a two-year contract for $400, you would divide $400 by two to get an annual value of $200. After that, you would add the annual value for all users together to get your ARR.

ARR should not include one-time fees, since these are not recurring.

How Does ARR Reflect the Stability and Predictability of Revenue?

Overall, ARR helps give you a reliable number so that you can predict future revenue based on your current customer base. It's a critical metric for growth trajectories and budgeting. It also provides a more stable view of your business’s finances compared to monthly recurring revenue (MRR).

For example, your MRR projections might include more severe dips and spikes depending on your sales patterns. However, these could be normal fluctuations for your business, so the numbers won’t give an accurate story about your business’s financial health. On the other hand, your ARR tells how your business is performing each year on a larger scale.

Key Metrics for Business Growth

CARR and ARR combine to give you a big-picture view of your business by allowing you to see both your current revenue and future revenue. However, it’s helpful to dig in a little deeper and get a better understanding of the underlying causes of revenue changes. Here are some other key metrics that subscription model businesses can use to monitor business growth:

• Churn rate — The percentage of customers that cancel their subscriptions within a certain time period
• Revenue churn — The percentage of lost revenue due to customers canceling their subscriptions
• Renewal rate — The percentage of customers that renew their subscriptions compared to the total number of subscriptions at the beginning of the period
• Customer lifetime value — The monetary value of each customer throughout their entire life
• Customer acquisition cost — How much you spend to take on one new customer

You should also track subscription billing metrics. Some payment systems lack efficiency, which can cause involuntary churn due to declined payments. Therefore, it can be beneficial to compare the percentage of collected vs. owed revenue, losses from refunds or chargebacks, and how much it costs to process your payments.

Choose the Platform That Reduces Churn Rate for Optimal ARR Growth

The higher your churn rate, the lower your ARR and CARR. Involuntary churn due to payment failure is one of the easiest problems to fix. Working with a high-quality payment processor is crucial to eliminating these losses.

Revolv3 has designed an AI-powered payment platform for subscription businesses. We use dynamic routing to increase approval rates and reduce involuntary churn. Plus, we only charge for approved payments. Learn more about Revolv3 to get started.