Contracted Annual Recurring Revenue

What is Contracted Annual Recurring Revenue?

Contracted annual recurring revenue (CARR) represents the total annualized value of recurring revenue from signed contracts. Unlike annual recurring revenue (ARR), which looks at a company’s current income, CARR focuses on the future. It measures revenues from contracts that are signed, even if they aren’t yet active.

CARR is helpful for companies with subscription revenue and long-term service agreements, as it provides a more accurate representation of future revenue growth potential. It offers a more nuanced view of a company’s financial health than ARR alone, as contractually guaranteed revenue from signed contracts has a high degree of certainty attached to it.

Synonyms

• Contracted ARR
• CARR
• Committed Annual Recurring Revenue

Importance of CARR for SaaS Businesses

Since recurring revenue and long-term contracts are the basis for CARR, it’s primarily a B2B SaaS metric.

In the SaaS business model, customers pay a recurring monthly or annual fee to access a software service. Unlike other types of subscription businesses, B2B SaaS companies generally have long-term contracts with their customers that guarantee recurring revenue for a set period.

To fully understand revenue growth when dealing with complex B2B contracts, it wouldn’t make sense to only look at current revenue figures. CARR is a way to communicate how much you’ll earn over the next year from deals you’ve already signed. With that, you can make strategic budgeting, investment, and growth decisions with a clearer understanding of future performance.

Benefits of Analyzing Contracted Annual Recurring Revenue

Of course, the #1 reason to measure CARR is to create a clearer and more contextually accurate picture of your company’s financial performance. But CARR provides several other benefits that may not be immediately apparent.

Cash Flow Management

Budgeting and strategic planning are quite difficult for most businesses because they don’t know for sure how much they’ll earn throughout the year. While there are certainly issues that could pop up (e.g., delinquent payments, early termination), SaaS businesses benefit tremendously from predictable revenue.

Instead of solely relying on projections and historical data when budgeting and planning for future investments, software companies can use their annual and multi-year contracts as a baseline for their revenue expectations. If they know they’ll make $X over the course of a year, it’s easier to figure out $Y they can allocate to sales, marketing, and other aspects of the business.

Revenue Forecasting

When SaaS leaders communicate performance and future plans to investors and stakeholders, they need to forecast revenue to justify their strategies. CARR is an excellent starting point for that.

You can first demonstrate the amount of income you’ll recognize over the course of the year. From there, you can more accurately predict how much you’ll add to that number via new sales, upsells, and renewals. You’ll end up with a more accurate projection than you would if you solely used ARR.

Sales and Marketing Insights

As you execute your sales and marketing strategies, proportional increases in CARR tell you which channels, approaches, and product lines yield the highest conversion rates or annual contract value. You could even break down CARR by salesperson, channel, or geographic region to identify high-performing and underperforming areas.

Operational Insights

Beyond its financial implications, CARR can also provide insights into operational efficiency. For example, a significant difference between ARR and CARR might indicate issues with service delivery or product deployment, suggesting areas where the business might need to improve.

Investor Relations

Anyone interested in (or actively investing in) a SaaS business will have a strong opinion on CARR. Because it offers a more detailed view of future revenue potential than ARR does, investors will often look at CARR numbers when evaluating companies.

Let’s say you’ve just launched a new enterprise tier in addition to your standard monthly subscriptions and you’re looking for outside funding to expand into other markets. You don’t have lots of recurring revenue at the moment because your product is still relatively new, but you’ve signed several long-term contracts with large enterprise customers during the past quarter.

You won’t be able to show it on your income statement, but the current demand and future earnings are clearly there. This is sufficient proof that people are buying your product and you’re set to be a cash flowing business, even if you haven’t yet.

Conversely, investors don’t know anything about future performance when they look at annual revenue. For all they know, 50% of your customer base could cancel their subscriptions next month. In this instance, CARR is a way to show you have a healthy customer base.

Components of CARR

There are two fundamental components of the CARR calculation: active contracts and annualized value.

Active Contracts

Active contracts are agreements with customers to deliver services or products over a specified period. This could be an annual contract, a multi-year agreement, or a shorter-term arrangement with the option to renew.

For CARR calculations, you factor in every active contract, even if you haven’t started billing or rendering the service.

Annualized Value

This component involves converting the revenue from contracts that are not annual but monthly or quarterly into an annual figure. For monthly contracts, you would multiply the monthly recurring revenue (MRR) by 12 to get an annualized figure. This standardizes all revenue figures on an annual basis, making it easier to aggregate and compare.

Calculating CARR

To illustrate the CARR calculation, consider the following scenario:

• Your company has several active contracts and a few that are signed but will commence in the future. For simplicity, let’s assume there are two active monthly contracts and one signed annual contract not yet started.

1. Calculate MRR.

Assume Contract A is $1,000 per month.

Assume Contract B is $2,000 per month.

Monthly Recurring Revenue (MRR) = $1,000 (Contract A) + $2,000 (Contract B) = $3,000

2. Annualize the MRR.

Annualize MRR to get part of the CARR:

$3,000 (MRR) x 12 = $36,000

3. Add signed but not yet active contracts.

Assume there is a signed annual Contract C that you’ve booked but haven’t started yet, valued at $12,000 per year.

Add this to the annualized MRR:

$36,000 + $12,000 = $48,000

The total CARR would be $48,000. This represents the sum of the annualized value of current active monthly contracts, plus the future revenue from the signed annual contract.

What CARR is NOT

Although they seem like they’re in the sale category, cntracted annual recurring revenue is actually remarkably different from:

• Annual recurring revenue (ARR)
• Monthly recurring revenue (MRR)
• Annual gross revenue (AGR)

There are also several nuances to consider, including implications for usage-based pricing, new or net new ARR, and churned ARR.

ARR vs. Contracted ARR

Understanding the difference between CARR and annual recurring revenue (ARR) is particularly crucial, as they serve distinct purposes and offer different insights into a company’s financial situation.

ARR is a measure of the normalized annual revenue generated from all active subscriptions or contracts at a given point in time. It does not consider whether these contracts are long-term or simply a monthly or annual subscription. It only shows what they’ve already generated in top-line revenue.

Essentially, ARR is focused on the past and present. It reflects the revenue from ongoing customer contracts. If a customer has paid $10,000 per month for access to your platform for the last 12 months, that $120,000 is ARR.

Contracted annual recurring revenue is quite different in this sense — it conveys how much a business will earn over the course of the next year, based on customers’ contractual obligations to pay. If a customer will pay $10,000 per month for the next 12 months once service begins, that $120,000 is considered CARR.

This fundamental difference makes CARR more similar to a metric like annual contract value (ACV) or total contract value (TCV).

Usage-Based Pricing and Contracted ARR

According to a report from OpenView Partners, 61% of SaaS companies currently use an entirely usage-based model (15%), a usage-based subscription model (31%), or are testing usage-based pricing (15%).

For nearly two-thirds of software vendors, that begs the question, “How can I account for variable, usage-based payments that exceed contracted amounts in CARR?”

The answer is simple. You don’t include any overages or variable components in your CARR calculation. Only your contracted baseline pricing that you’re guaranteed to receive should count toward CARR.

That means companies that primarily operate on a usage-based model and don’t have a set minimum annual commitment would not benefit much from measuring CARR.

New and Net New ARR vs. Contracted ARR

Contracted ARR factors in anything that is under contract, regardless of whether it’s new business or a renewal.

That means you’ll include new ARR (contracted ARR from new customers) and net new ARR (new contracted ARR plus expansion ARR, minus churn ARR and downsell ARR).

When to Include Churned and Downsell ARR in Contracted ARR

Here’s where it gets a big confusing. Since you calculate net new ARR by adding new contracted ARR to expansion ARR, and then subtracting churned ARR and downsell ARR, it’s logical to assume that those figures should be included in CARR.

You should only incorporate churned ARR in the accounting period the downsell, termination, or expiration without renewal contractually occurs. Do not deduct it from CARR upon learning about known upcoming churn or downgrades.

Ways to Improve Calculated Annual Recurring Revenue

When we calculate CARR, we’re concerned with (a) contract value) and (b) customer churn. So, besides the obvious (closing more deals), there are two ways to improve your CARR figure: increasing contract value and reducing customer churn.

Increasing Contract Value

To increase your ACV and TCV, you have to do more than just win new business. You have to continuously pursue contract expansions, upsells, and cross-sells while also finding ways to increase your average deal size.

There are several changes you can make to your sales process to increase contract value:

• Develop new features for a more advanced product tier.
• Offer microservices (e.g., DealHub CPQ is available standalone or with DealRoom and DealHub Billing).
• Incentivize multi-year deals (e.g., through discounting) to increase TCV.
• Upsell and cross-sell to existing accounts and leads in your pipeline.
• Prioritize longer-term contracts (yearly subscriptions vs. monthly).

Reducing Customer Churn

Customer churn is the enemy of CARR. Any time you lose a customer, your CARR will drop. And the harder it is to win new business and upsell existing customers, the more crucial it becomes to reduce your churn rate.

Here are a few ideas for avoiding customer churn:

• Use SaaS subscription management software that tracks user engagement and identifies at-risk customers.
• Deliver a personalized customer experience.
• Offer fast, responsive, and helpful support.
• Invest heavily in customer onboarding to drive long-term user adoption.
• Engage customers through marketing collateral and advocacy programs.
• Improve lead scoring and qualification processes so the customers you close are more likely to stay and grow.
• Collect and act on customer feedback.

How the Revenue Tech Stack Can Help Improve CARR

Since sales, subscription management, and ongoing customer success efforts are so integral to CARR, the software you use can actually play a big role in your ability to improve CARR over time.

Let’s take a look at some of the most valuable pieces of a modern revenue tech stack and how they can help support your efforts to improve CARR.

CPQ

Configure, price, quote (CPQ) centralizes product and pricing data, automates pricing calculations based on discounting rules and other criteria, and generates accurate quotes. Based on your product rules and its guided selling capabilities, your CPQ system can recommend upsells, cross-sells, and other contract changes that maximize value for your customer and deal size for you.

Of course, it also makes your sales team more efficient, which makes them more likely to hit quota and continue closing business at a high rate.

Subscription Management

Subscription management software for SaaS companies handles everything from generating invoices to managing renewals. It integrates with your application and customer portals, so customers can make changes to their subscriptions and you’ll see real-time reflections on your end.

Automated renewal flows significantly improve your contract renewal rates, and recurring billing eliminates the need to manually invoice customers each month. Plus, with data on customer usage and engagement, you can identify how different customer segments are performing over time and which customers need additional attention.

Billing 

The right billing software goes beyond invoicing. It enables you to collect recurring payments automatically, manage payment failures and dunning processes, and provide customers with self-service portals for upgrades or downgrade options. It also handles revenue recognition and calculates CARR on your behalf.

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