As long as the country’s in a censorship mood, I figured that I could jump on the bandwagon and propose that we ban discussion of one of my pet-peeve SaaS metrics: 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:
- If it’s the VP of New Customer Sales, then very angry. They landed at 60% of plan, not 96%.
- If it’s the VP of Sales (responsible for all new ARR), then still pretty angry. They landed at 73% of plan, not 96%.
- If it’s the VP of Customer Success (and they’re responsible only for churn), then not angry at all. They were spot on plan though we had a little more shrinkage ARR and a little less lost ARR than plan. Good job, but I have a few questions.
- If it’s the CRO, responsible for both new and churn ARR, then back to very angry. Net new ARR (new ARR – churn ARR) was $825K, 60% of plan, not 96%.
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?
- It talks about by performance by area, where action and accountability happen, and not in aggregate.
- It’s transparent. It doesn’t pretend a bad performance is a good one, or that 93% of plan is good.
- It tees up subsequent discussion by the relevant leaders. Trust me, leading that discussion is a form of accountability all by itself.
- It discusses ending ARR correctly: both as a result and as a cumulative metric, which means that, unlike the other period metrics, it’s one that we should strive to re-catch.
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.
I agree with what you’re saying. If an Ending ARR narrative is presented to the Board, members should ask the tough questions of all the GTM people in the room, and the CEO and CFO if not.
I have greater heartburn when I hear “Churn Plan”. Every company should strive to have zero churn, so CS people should be talking about expected churn. Churn plan implies it’s acceptable to shoot for that target; expected churn suggests we can work to reduce it. To be sure CFOs need to have a churn “plan” number for the budget model, but that’s a different use.
Interesting. I get where you’re coming from but I’d say you need a churn plan anyway. Ultimately, it comes down to planning philosophy. We should win all deals, too, but we don’t model a 100% win rate (more like 15 to 25% imho). I think of CS like a diving competition — there is a degree-of-difficultly associated with renewing any given or set of accountants and the great irony is — we want to put our best CSMs on the hardest dives. If you give me three broken $500K accounts and $1,500K of normal accounts, and then tell me I *failed* if I couldn’t make them worth NRR% * $3,000K a year later, I’m going to say that’s unfair. Ergo, I think CSM comp and success should be measure on expected/forecasted basis. That is, the $1.5M in normal customers we want to turn into NRR * $1.5M, but the three broken ones — if you can save 2 of them you’d be a hero. Ergo, your plan is $1.5M + $1.0 = $2.5M = $500K of “planned’ churn.