Using the Subscription feature in Upsales for invoicing and billing? Here's how recurring revenue works.

This article covers how to know:

• Whether your recurring revenue increasing or decreasing
• How high is your churn, and how it affects your growth rate
• How cancellations may affect your future churn rate

Key terms

• Annual Recurring Revenue
• Monthly Recurring Revenue
• Expansion
• Contraction
• Churn
• Churn rate
• ARR growth
• ARR growth rate
• How Upsales automagically keeps track of all the above for you

Annual Recurring Revenue (ARR)

ARR is the value of the recurring revenue of a business's term subscriptions normalised for a single calendar year.

Example:

• You have 10 customers each paying you €100 every month
• Your ARR is 10 x €100 x 12 = €12,000

Monthly Recurring Revenue (MRR)

MRR is the same as ARR but on a monthly basis, so the total of all your monthly payments. So in the example above, your MRR is €1,000

Expansion

Increased value from existing customers, such as upsells, add-ons, extra seats.

Contraction

The decreased value of contracts from downsizing/downgrading.

Churn

The total value of customers who stopped subscribing to your service.

In the ARR Insights dashboard, this is calculated as the sum of churned customers AND customers who decreased in contract value. 

Churn rate

Annual percentage rate at which customers stop subscribing. Usually measured within a single calendar year, or a rolling 12 months.

Example

In the above example, the business loses a customer, and drops the contract value of another customer. Churn rate is the sum of these two changes (€1,500) divided by the starting ARR.

ARR Growth

Value of all the changes in your ARR during a calendar year. See the example in the next section.

ARR Growth Rate

Annual percentage change of your ARR. 

Example

How Upsales automagically keeps track of all the above for you

Every night, a particular kind of magic happens in your Upsales database. We take a snapshot of your current ARR and save that data. That way you know the ARR from each customer on every date.

Changes are logged as New Customer, Churn, Expansion, or Contraction.

But wait! What if I make a mistake and correct it the day after?

The good news is, we take care of that too. Below are three cases where we clean your data.

1. New customer that churns within 90 days

Imagine you create a new subscription that you delete/terminate within 90 days. The record of new customer and churn will be removed from the database (because the sum is 0).

2. Churned customer that's regained with the same amount within 90 days

Imagine a contract is terminated and a new subscription starts within 90 days. With the same amount. The record of churn and new customer will be removed from the database (because the sum is 0).

3. Contraction on a new customer within 30 days

If you create a new subscription and decrease the value within 30 days, this will not be logged as a contraction. Instead, the amount of the "New customer" record will be reduced.

Churn vs cancellations

Since the notice of cancellation often arrives long before the expected renewal date, churn imminently becomes a lagging measure - making it difficult to act on.

So churn is neither a fair nor an up-to-date reflection of how your business is going. Received or incoming cancellations, however, is a concurrent performance indicator. It gives you a more accurate insight into how well you’re managing your clients right now. 

How cancellations are logged

A cancellation will be registered when:

• you enter a termination date for an active subscription
• the customer lacks a future subscription (a subscription with a start date in the future).

If you remove the termination date before the subscription expires, the cancellation log will be deleted from the database.