In today's business environment, companies often rely on subscriptions as a key driver of revenue. Whether it's in the form of consumer-facing subscription boxes or SaaS platforms, many companies have recognized the value of setting up systems that deliver consistent, recurring revenue from their customers. In fact, the subscription economy is expected to amount to 1.5 trillion dollars in the year 2025.

Of course, like any other business, subscription-driven companies need to be able to effectively track their revenue to identify growth opportunities and challenges – and one of the best ways to do this is by looking at their annual recurring revenue (ARR).

Related: 5 Essentials for Building a Subscription Business customers won't give up

What is ARR, and why does it matter?

Annual recurring revenue is a key metric in the subscription economy which measures the recurring revenue the business receives from its subscriptions over a single calendar year. ARR is based on subscription revenue only and does not account for purchases or one-time fees.

ARR is often calculated on a per customer basis – dividing the total value of a subscription contract by the number of years in the subscription contract. Adding the value of each customer's annual subscription provides the total ARR.

As the Institute of Corporate Finance explainsARR is a valuable metric for subscription-driven companies because it helps them quantify growth, evaluate the success of the subscription model, and predict future revenue. With ARR, organizations are able to assess the overall health of their business and whether current subscription revenue (and subscription growth) is in line with the organization's goals.

1. Introduce multiple pricing options

For organizations trying to increase their number of customers so that they can then increase their total ARR, introducing multiple pricing options can be a smart strategic practice. This has become especially prevalent in broadcasting, where virtually every broadcaster has it introduced multiple subscription levelsmainly divided into ad-supported and ad-free content.

For example, after introducing its ad-supported tier just over 18 months ago, Netflix's ad-supported tier now allegedly counts over 45% of new registrations — a clear indication that offering a lower-priced plan made its offerings more attractive to budget-minded consumers.

Offering multiple tiers or pricing options is certainly not limited to streaming. Many SaaS businesses also use this model successfully, with pricing tiers based on factors such as the number of users accessing an account, the amount of available storage or bandwidth, and other factors.

Too often, many of the most desirable features are locked behind a higher-priced tier, which encourages subscribers to choose the more expensive option. However, by giving your audience multiple price points to choose from, you can increase ARR by becoming more desirable to both budget-minded and feature-focused audiences. Pricing can also make your basic service level more attractive, further driving subscription and increase in income.

Related: 5 tips for growing your subscription business

2. Be strategic with price promotions

A common technique used by subscription-driven businesses is to offer a price promotion, usually by getting users to sign up at a steep price. discounted price for the first year before reverting to the standard price in subsequent years. Although discounts are effective in driving signups, they can be even more powerful when backed by a strategic campaign.

Written by the co-founder, Iman Gadzhi, a case study by Flozy demonstrates how effective promotions can be driven by much more than an attractive price point. In preparation for the company's first Black Friday, their team created a significant amount of educational content to go along with the Black Friday campaign.

As a result, while the Black Friday campaign started with a significant discount on the company's annual plan, it was further supplemented with free educational content and live events with the founding team. This strategic approach that went beyond a simple price promotion resulted in a 1,000% increase in revenue — and helped demonstrate the fundamental value of the subscription from the start.

3. Make sure you have the systems and support you need

How valuable are growth-oriented strategies, TAKING cannot be ignored. If you have high churn rates, then you don't really have annual recurring revenue. Instead, your subscription-based business will work more like a traditional business model, in which you have to constantly follow up with new customers.

Because of this, businesses that have ARR as a key performance metric must invest heavily in customer satisfaction and retention efforts. In the Flozy case study cited earlier, after the company's initial growth, implementing 24/7 support and daily customer service sessions that provided real-time assistance played a key role in helping to satisfy existing customers while also driving new monthly growth increases when the company reintroduces marketing.

Businesses should regularly assess the pain points that are causing customers to cancel their subscriptions and focus on processes and practices that address these areas. Correcting the gaps and finding ways to increase the value you provide to your existing subscribers is key to keeping them in the long run. Such actions can also do possible price increase more enjoyable, as long as subscribers still feel like they're getting good value.

Related: How to improve the bounce rate of your subscription business

For subscription-driven business models, few metrics are ultimately more important than ARR. By prioritizing this metric as part of your acquisition and retention process, you can identify initiatives and processes that will help you build a loyal customer base that brings in reliable revenue for years to come.