Just a quick post to share my slides from today’s presentation at SaaS Metrics Palooza 2024, entitled The Impact of AI on SaaS Metrics.
The short summary is:
- The concept of ARR is already challenged by monthly-varying pricing, e.g., usage-based pricing.
- AI will exacerbate that problem, bringing new forms of value-based pricing, e.g, unit-of-work or outcome-based pricing.
- There are two schools of thought on dealing with this: (1) split the ARR baby into baseline and variable, then analyze the baseline as if nothing has changed, and (2) spend is truth, where we substitute trailing spend for ARR. I’m in the second camp.
- AI will, gasp, require us to think about cost, something we don’t really like to do in the software business and something we’ve historically been able to kind of ignore.
- All the heavy lifting is going to move to the pricing model.
In short, to know ARR we used to read contracts. In the future, we’re going to read invoices, instead.
Yes, for internal reporting we will do a lot of pricing model analysis and examination of the base/variable split. But for external reporting, the big six SaaS metrics all depend on ARR and going forward that won’t change. We’ll just use some proxy for ARR, as many quietly do already today.
Like a duck, nothing will change much on the surface, but they’ll be a lot of activity underneath. And the metrics won’t mean quite the same thing as they once did. For example, ARR and NRR will become less forward looking and work less well as leading indicators.
I’ve embedded the slides below.
You can download a PDF of the slides here.
Thanks for coming!
Dave’s session at SaaS Metrics Palooza was so thought provoking / if you use ARR as a metric in your SaaS company – this session is a can’t miss!