The Ultimate Guide To Revenue vs. ARR (and How To Make More Of Both)
Every organization needs revenue, which is why it’s the first metric on most companies’ income statements. But do you really know what revenue is and how it differs from other financial metrics, such as profit and ARR?
In this article, we’ll answer the question, “What is revenue?” and explain the different kinds of revenue you’ll likely run into. Then we’ll share a simple formula you can use to calculate revenue for your own company. Finally, we’ll give you seven tips to increase your revenue.
Sound like a plan? Great, let’s get started!
Quick Note: calculating revenue and compiling income statements can be tricky. Connect with a law firm for legal advice and/or an accounting firm or tax professional for financial advice. Also, many of the principles we talk about in this article also apply to personal income statements, in regard to tax returns and the personal income tax you pay every year.
What is Revenue?
Revenue is defined as the money a business generates through normal operations, such as the sale of products and/or services, over a set period of time, e.g. one month.
There are different kinds of revenue that you need to be aware of. The most common are operating revenue, non-operating revenue, top-line total revenue, bottom-line revenue, accrued revenue and deferred revenue.
You’ll find that most of these revenue types are tracked via company income statements, as is the cash flow that a company has on their cash flow statement.
Now, let’s take a closer look at each kind of revenue mentioned above.
Operating Revenue vs. Non-Operating Revenue
Operating revenue is the form of revenue you’re probably most familiar with. It’s the earnings a small business or large enterprise generates from the sale of products and/or services.
When Apple sells a customer a new iPhone, for example, Apple generates operating revenue. This is usually shown on a quarterly basis via an income statement.
Non-operating revenue is the money a business generates through non-traditional means, like litigation, by accepting donations, or random things like rental income or tax income from a return. As such, it’s typically a variable and unreliable revenue stream.
If your company sued a competitor for copyright infringement and won, for instance, the money generated would be considered non-operating revenue.
Top-Line Revenue vs. Bottom-Line Revenue
Top-line total revenue, also known as gross revenue, is the money your company generates during a specific statement period. This figure does not account for expenses.
Bottom-line revenue, also known as net revenue, is the money your company generates during a statement period, minus all relevant expenses and refunds.
Imagine that your company sold 50 products last month at $1,000 each. Your top-line revenue would be $50,000. Now, imagine that it cost your company $10,000 to make those sales. You also had to pay $2,500 in taxes and $5,000 in interest. So your bottom-line revenue would be $32,500.
Accrued Revenue vs. Deferred Revenue
Accrued revenue is the revenue your company has earned, but not collected.
An enterprise software company, for example, may sell, configure, and deliver a piece of software to a Fortune 500 client. When they do, they’ll invoice the client for the agreed upon amount. This is a form of accrued revenue because the software company has earned the revenue by delivering the goods, but won’t receive payment for 30, 60, or 90 days.
Deferred revenue is the opposite of accrued revenue. It’s the revenue your company receives, but hasn’t yet earned.
If the Fortune 500 client in the example above paid the enterprise software company in advance to sell, configure, and deliver a piece of software, that would count as deferred revenue.
Revenue vs. Profit: What’s the Difference?
Revenue and profit are different, but both are important.
The terms “revenue” and “profit” are often used interchangeably. This is a serious problem because total revenue and profit are not the same thing, though they’re both important.
As we discussed, revenue is the money your business generates from sales, and, in some cases, via non-traditional methods like litigation. It does not account for expenses.
Profit, on the other hand, is revenue minus expenses.
(Note: if you’re thinking to yourself, “Profit and bottom-line revenue sound similar,” you’re exactly right. Bottom-line revenue is another name for profit.)
Every company will have a different set of expenses. Some of the most common expenses are the ones related to inventory, rent, labor, marketing, and taxation. Each of these things must be accounted for to gain an accurate understanding of your company’s profitability.
Revenue vs. ARR: What’s the Difference?
There’s another distinction we need to make: the difference between revenue and annual recurring revenue, better known as ARR.
Total revenue accounts for every dollar that a business generates, regardless of where it comes from. ARR, however, only accounts for subscription-based revenue.
ARR is an incredibly important metric for SaaS companies and other subscription-based businesses. But it should never be confused with total revenue.
What’s the Difference Between ARR and MRR?
If we’re going to talk about ARR, we might as well mention its little brother, MRR, too.
MRR, which stands for monthly recurring revenue, is the money a subscription-based business, such as a SaaS company, generates from subscriptions every month.
Let’s pretend you own a SaaS company. In exchange for a monthly fee, you grant customers access to a professional-level audio recording tool. You currently offer two versions of your tool: “Beginner,” which costs $10 a month, and “Professional,” which costs $25 a month.
As of right now, your company has 10,000 customers on the “Beginner” plan and 5,000 customers on the “Professional” plan. As such, your company’s MRR is $225,000. Your ARR, on the other hand, is $2,700,000, though this could change if your customer base fluctuates.
Many times the valuation of your company will be based on the MRR that you are producing and will be a sign of good health based on your quarter over quarter growth with MRR. Marketing and sales or your product can be a great influence to building up your MRR.
A lot of SaaS companies will also go the “freemium” route where you offer the base of your product for free and then options to upgrade to a pro license, team license, or enterprise license. Having a freemium business model can be a great way to influence MRR because you can make adjustments to product limits on the fly or offer end of quarter coupons for pro or team accounts to help grow your business.
Note: ARR is generally used by large enterprises that sell annual contracts. If you sell subscriptions on a monthly basis, MRR is probably a better metric for you.
Is ARR Better Than Revenue?
With a SaaS business, ARR and revenue are both important metrics. Generally speaking, neither is better than the other. The one you rely on will depend on the kind of business you own/work for.
A SaaS business is primarily focused on ARR. The beauty of ARR is that if you can keep a low churn rate it continues to grow on itself with new subscribers. Regular revenue is subject to more to seasonality, product releases, and recessions.
- If your business sells products and/or services to customers without requiring them to sign up for a monthly or annual subscription, you should track revenue.
- If your business sells products and/or services to customers on a recurring annual basis, like an enterprise SaaS company, for example, you should track ARR.
- And if your business sells one-off products and yearly subscriptions, you should track revenue and ARR.
A lot of companies in the tech space have made the move to tracking ARR as well as revenue. Adobe and Microsoft are two notables. Both of these companies used to sell boxed products in stores. That would lead to big spikes in revenue when a new boxed product was released, and a drop off the rest of the time.
The move to SaaS for Adobe (Creative Cloud), Microsoft (Office365), and many others has evened out revenue and built an ARR model for many others to follow.
Is There a Revenue Formula?
Calculate revenue for your company with this revenue formula.
Ready to calculate revenue for your company? Don’t worry, it’s not that hard. Simply plug your financial information into one of the revenue formulas below.
If you run a product-based business, multiply the number of units you’ve sold over the last statement period by the average price of each unit. This revenue formula looks like this:
Revenue = [# of Units Sold] x [Average Price of Unit]
Example: Widget Co. sells low-cost gadgets out of mall kiosks. Last month, the company sold 1,000 gadgets for an average of $15 each. As such, it generated $15,000 in revenue.
If you run a service-based business, multiply the number of customers you’ve served in the last statement period by the average price of service. This revenue formula looks like this:
Revenue = [# of Customers] x [Average Price of Service]
Example: SaaS Inc. sells an industry-leading software tool via subscription. It has three pricing tiers, ranging from $10 to $50 a month. Last statement period, the company served 2,000 customers, who paid an average of $23.75 each, resulting in $47,500 in revenue.
Now that we have gotten into what revenue is, let’s talk about how to boost revenue for your company.
7 Ways to Boost Revenue For Your Company
Learn seven straightforward ways to boost revenue for your company.
You want to generate more revenue for your company. The question is how? These seven tips will help:
1. Focus on Your Current Customers
To boost revenue, focus the bulk of your energy on current customers. These people already enjoy using your products and/or services. As such, they’ll be easier to upsell and cross-sell, which will help you drive additional revenue, without having to invest additional resources.
The process is simple:
- Take a look at your tech company’s current offerings.
- Pinpoint the ones that each customer has already purchased.
- Assess whether each customer might benefit from a secondary product/service.
- Pitch said product/service to the customers, making sure to emphasize its benefits.
One more thing: it costs five times more to acquire a new customer than it does to keep an existing one. So, you can boost revenue and profit by focusing on current customers.
2. Perfect Your Pricing Strategy
How much do you charge customers for your products and/or services? A better question: is this the right amount to charge them? If not, you’re leaving money on the table.
Pricing is essential. Charge too much and you’ll have a hard time acquiring customers. Charge too little and you’ll damage your revenue potential. Once you find the perfect balance, though, you’ll avoid both of these problems and propel your business forward.
To hone your tech company’s pricing strategy, analyze your competitors. What do they charge? Consider charging something similar—especially if your offerings are comparable.
After conducting competitor research, you may find that you’re charging too little for your products and/or services. If this is the case, raise your prices incrementally. A dramatic price increase will alienate your current customers, which, as we discussed above, is a bad idea.
3. Build Your Company’s Reputation
You can boost revenue by making more sales. To do this in a consistent manner, you have to earn your prospect’s trust. This is easier to do when your company has a stellar reputation.
Here are a few ways you can improve your brand’s reputation in the marketplace:
- Sell great products and/or services.
- Provide top-level customer support.
- Collect positive reviews about your company.
- Create valuable content for your target audience.
- Support causes that your customers believe in.
Your tech company’s reputation will affect its ability to earn revenue. Work hard to build and maintain it. That way your ideal customers will begin to know, like, and trust your brand.
4. Develop a Solid Marketing Plan
One of the most obvious ways to boost revenue for your tech company is to improve your marketing plan, which will allow you to reach more potential customers in less time.
You could, for example, invest in email marketing which has an average ROI of 3,600%. Or pay-per-click (PPC) advertising on platforms like Facebook and Google Search, which give companies access to billions of people which they can market to.
Your website is a viable marketing channel as well, especially if you’re committed to blogging and SEO. These strategies take a lot of time and effort, but can deliver incredible results.
Then there are traditional marketing channels such as paper flyers, billboards, and radio and TV commercials. While these strategies may seem outdated, they can still prove valuable.
The trick is to develop the right marketing plan for your unique business.
Study your current marketing efforts. Are they working? Evaluate your competitor’s marketing efforts, too. Can you “steal” their strategies? And don’t be afraid to experiment. You don’t know which marketing plan will work best until you try different things.
5. Offer Coupons and Discounts
It may sound counterintuitive—how do you boost revenue if you charge customers less for your products and services? Coupons and discounts work because they give potential customers a reason to buy now. You won’t make anything if they stay “on the fence.”
Coupons and discounts encourage future business as well.
Let’s say you give a new customer 20% off their first purchase. That 20% is easy to make back if said customer buys a second product a month later, and a third the month after that.
6. Invest in Revenue Operations
Do you have the right team in place to take advantage of revenue growth?
Build a revenue operations team to focus on optimizing your company’s revenue streams. Quality rev ops professionals will look into marketing, sales, and product operations to find new opportunities for growth, as well as ways to reduce costs for higher profit.
If you are a SaaS business, rev ops will help you maintain consistent subscription growth and get to the next level. Rev ops can also help mine your product usage data and other details to create upsell opportunities to your existing customers.
PQLs and XQLs are all the rage. Check out the next section to learn how to build them out.
7. Try Out Other Lead Forms Like PQLs and XQLs
Product qualified leads (PQLs) and Expansion Qualified Leads (XQLs) are growing in popularity for product led companies and investors looking for strong growth.
The process is essentially looking for ways to convert a free user into a paying user with limits, trials, coupons, and other conversion moments. The rev ops team works with marketing and sales to identify tests to create these opportunities based on usage data.
XQLs are similar to PQLs , but focused on finding ways to expand existing customers. It could be looking for new opportunities for licenses or adding security features for enterprise customers.
Both PQLs and XQLs can be a great way to develop a product road map, impress investors, and even turn active free individuals into customers.
Revenue is an essential metric for your tech company. Without it, you won’t be able to do much of anything. Fortunately, calculating revenue isn’t rocket science. Simply use one of the formulas we shared in this article.
Once you know how much revenue your company generates, work to boost that number. You can do this by implementing the seven tips listed above.
Looking to accelerate revenue growth? Book a free demo of Immersa today.