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Don’t Hide Behind Ending ARR

I’m writing to propose that we limit discussion of my top, pet-peeve SaaS metric: ending ARR.

Wait, but aren’t you the guy who said that if you only knew two things about a SaaS company and needed to value it, one would be ending ARR and the other would be its growth rate?

Yes. That’s true. But the primary business of a SaaS company isn’t valuing itself. And, as an operational metric, ending ARR stinks. I dislike talking about ending ARR for the same reason I dislike talking about revenue. In a SaaS company, revenue is a result, not a driver.  Revenue is a math problem, not a key performance indicator (KPI). The same is true for ending ARR. It’s a math problem; just a simpler one.

Let’s use an example to show my point. Imagine you’re at a post-quarter board meeting and one of the executives presents this leaky bucket …

… along with this narrative: “blah, blah, blah … well, it was a good quarter, we landed at 96% of plan … blah, blah, blah.”

How does that narrative make me feel? Generally, angry. How angry? Well, that depends a lot on who’s saying it:

Look, bad quarters happen.  I’m not angry about the bad quarter.  I’m angry when people try to pretend a bad quarter was good one.  Or, even more scarily, at the prospect that someone might actually believe that a bad quarter was a good one.

Talking about ending ARR is like a giant, “Hey look over here!” distraction.  It’s the green arrow that I added above.  Executives should talk about their area of responsibility and characterize theirquarter based on performance in that area.

When a VP of Sales who’s at 60% of plan talks about “a good quarter on ending ARR,” I ask myself when did they get promoted to CFO?  When a CRO who’s at 73% of plan says, “As shareholders we should be happy that we grew the ending ARR 67% year over year,” I think:  no, as shareholders, we pay you to hit the new ARR plan and you’re at 73%. 

When it comes to sales leaders, ending ARR, like patriotism, is the last refuge of the scoundrel.

The CEO and CFO can talk about ending ARR.  But even they need to get the delicate narrative right — remembering that for a SaaS company at the above scale, it’s all about acquiring new customers to join your NRR expansion flywheel. Here’s the right narrative:

Overall, it was a weak quarter. We landed at 73% of the new ARR plan. While we got close on expansion ARR at 93%, new logo ARR was a dismal 60% of plan — something we’re going to drill into with Kelly in the next section. On the churn side, things were pretty good. We hit the churn target of $625K and while we were able to beat plan on lost-customer ARR, we had $50K more in shrinkage ARR than plan, which Reese will discuss. The net result is that we ended the quarter at 96% of ending ARR, a gap of $550K which we think we can close in 2Q.

Why is this the right narrative?

The last point is subtle.  Instead of using ARR as a mathematical keel to damp underperformance (by a factor of around six), we’re doing the opposite.  We’re recognizing that even if we hit every other plan number for the rest of year, that we will still end the year with $550K shortfall.  We’re recognizing that and making a commitment to try and catch back up. 

We’re using ending ARR to increase accountability, not dampen it.  Goosebumps.

Hopefully, this explains my modest proposal:  unless you’re the CEO or CFO and it’s the finance section of the meeting, you should never talk about ending ARR.  Talk about what drives it, instead.

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