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Annualised Revenue

Two terms you might come across are monthly recurring revenue and annualised recurring revenue, sometimes shortened to MRR and ARR respectively. MRR is the revenue that happens repeatedly every month, and ARR is the 12-month view of that recurring revenue. For example, if you add a new customer who's consuming $1,000 of services half way through a year, you'd get to bill them six times. This means their MRR is $1,000, and their total revenue for that first year is $6,000 (6 months * $1,000). Assuming you keep the customer, going into the next year you'll get to bill them 12 times instead of 6, so the ARR is 12x the MRR, or 12 * $1,000 = $12,000.



Your baseline is the existing recurring revenue that you're building your future plans upon. For example, if you finish the last month of your last fiscal period on $10,000 of recurring revenue, then that's your baseline. This matters because you probably aren't starting from $0 and it's important to factor in your existing baseline when trying to calculate your targets. A $10,000 per month baseline equates to $120,000 of total revenue for the next year (12 months * $10,000 of recurring revenue) - if your target is $240,000, then you've already got half of that 'in the bank'!


Customer Adds

Adding customers is one method of generating more revenue. A customer 'add' is simply establishing a new relationship with a customer where they consume services that you bill them for each month. These services might include several things, such as the cloud costs (for example the Microsoft Azure services), your support and management costs, margin, etc. These costs might be bespoke per customer, or more 'off the shelf' as a standard managed service, IP you deliver in a SaaS model, etc. However you think about it, a customer is worth an amount of money to your business each month, and you should have a goal in mind for the minimum amount a customer should consume per month in order to calculate how many customers you'd need in order to achieve your targets.

The other main method of generating revenue is by growing the spend of your existing customers by selling them more services. Deciding the minimum amount you want a customer to spend per month will help you understand how much of your target should come from adding more new customers versus growing existing ones. There'll be many factors in this decision, including your capacity to add and manage more customers and your customer lifecycle management process to be able to grow existing customers.


Recurring Revenue

Recurring revenue is the amount of money you're receving each month from the sale and consumption of your services. This is different to traditional purchasing. For example, if I purchase a physical server costing $5,000 you'll get to bill me once for $5,000. You might not sell me anything else for weeks, months, or even years. If, however, you're selling me a cloud service at $1,000 per month, you get to bill me every month that I use the service - this means you'd have $1,000 of recurring revenue. One of the biggest differences in sales between traditional 'up front' billing, and recurring billing, is how you approach hitting your targets.

Let's say you've got 12 months and a target of $100,000 of revenue to generate. In a traditional model, where you're selling $5,000 physical servers, you'd need to sell 20 servers to hit your target. If you build your pipeline through the year, you could wait until the last day of the year and close all those deals and see all of that revenue immediately.

In the recurring revenue world, where you're selling $1,000 per month cloud services, you need to think differently. If you sell one 'server' in the first month of your year, it's worth $12,000 (12 months * $1,000 per month), if you sell one in the second month, it's worth $11,000 (11 months * $1,000 per month). If you sell your 'server' in the last month then it's worth only $1,000 (1 month * $1,000 per month). If you leave closing deals at the end of the year, you'd need to add 100 'servers' in the last month!

Instead, if you add one 'server' per month (1.3 to be exact in this example!), you'd only need to add 15.4 to generate $100,000 of revenue in the same 12 month period.