I swear I wrote my SaaS Metrics Palooza presentation before you published this. You're asking if ARR is dead. CJ at Mostly is trying to differentiate recurring vs. re-occuring revenue. TheSaaS CFO is calling for a new SaaS P&L. I'm calling ARR the Achilles' Heel of SaaS metrics, which as a statue, should resonate with you.
This is a real issue and a lot of people are identifying it and wondering what to do about it. So great post and thanks for weighing in.
My evolving take is this: for internal analysis, reporting, forecasting, etc., you need to analyze this in depth and it's really a pricing model (and contractual terms) optimization discussion. For SaaS metrics, it's all about finding the right *proxy* for ARR and then just plugging that into the existing formulas.
In the end, I think spend = truth and, to your point, unless you're doing 10-year deals, *all* of it might-recur vs. will-recur. The latter is simply amortization and that's not, originally, IHMO what the second R in ARR meant. Compared to on-premises you might renew your contract which in on-premises was a concept that didn't even exist (except for maintenance).
Looking forward to your presentation! It certainly has created a lot of confusion.
Agree with your points. People need to make sure they understand the intent of ARR before calling things ARR and applying traditional SaaS metrics to it
ARR is definitely nuanced especially with early/mid stage startups, it can give a very misleading view of scale.
You mention hybrid UBP - a lot of SaaS startups enforce a UBP with ‘minimum spending commitments’ so essentially that latter portion becomes the RR component. So for businesses that see positive NDR, the ARR is understated and for those that don’t, this will overstate it.
Also, startups tend to give SaaS customers flexible opt outs - it’s surprisingly common for customers to negotiate a price break and no early termination penalty. This + revenue concentration for the low volume, high ACV businesses tend to overstate ARR as well.
Great reading through this. The level of pricing in foundational models will likely power the shift toward usage-based pricing. Although LLMs are getting commoditized, I suspect they'll remain an order of magnitude more expensive than traditional server and database fees. It is kind of like serving food buffet style or ala cart; there is tension between the consumer and supplier as unit pricing becomes more of a factor. Usage pricing, paying for what you use, seems much more aligned for both parties.
Good morning. I read the translation into Spanish made by Salvador Lorca of one of your articles, and I liked very much.
Can I do the same with this one, also with links and a description?. For my newsletter "dineros" ("money") in Substack, who has subscribers and followers interested in financial issues.
I’m still surprised there hasn’t been more (visible) pressure yet to cut costs at companies paying such hefty sums for their SaaS software.
I can see the narrative shifting a little, but price points are currently very clearly linked to the ARE targets set. It’s surely going to burst in a big way?!
Dear Only,
I swear I wrote my SaaS Metrics Palooza presentation before you published this. You're asking if ARR is dead. CJ at Mostly is trying to differentiate recurring vs. re-occuring revenue. TheSaaS CFO is calling for a new SaaS P&L. I'm calling ARR the Achilles' Heel of SaaS metrics, which as a statue, should resonate with you.
This is a real issue and a lot of people are identifying it and wondering what to do about it. So great post and thanks for weighing in.
My evolving take is this: for internal analysis, reporting, forecasting, etc., you need to analyze this in depth and it's really a pricing model (and contractual terms) optimization discussion. For SaaS metrics, it's all about finding the right *proxy* for ARR and then just plugging that into the existing formulas.
In the end, I think spend = truth and, to your point, unless you're doing 10-year deals, *all* of it might-recur vs. will-recur. The latter is simply amortization and that's not, originally, IHMO what the second R in ARR meant. Compared to on-premises you might renew your contract which in on-premises was a concept that didn't even exist (except for maintenance).
Looking forward to your presentation! It certainly has created a lot of confusion.
Agree with your points. People need to make sure they understand the intent of ARR before calling things ARR and applying traditional SaaS metrics to it
Great read!
ARR is definitely nuanced especially with early/mid stage startups, it can give a very misleading view of scale.
You mention hybrid UBP - a lot of SaaS startups enforce a UBP with ‘minimum spending commitments’ so essentially that latter portion becomes the RR component. So for businesses that see positive NDR, the ARR is understated and for those that don’t, this will overstate it.
Also, startups tend to give SaaS customers flexible opt outs - it’s surprisingly common for customers to negotiate a price break and no early termination penalty. This + revenue concentration for the low volume, high ACV businesses tend to overstate ARR as well.
Devil is always in the details!
Great reading through this. The level of pricing in foundational models will likely power the shift toward usage-based pricing. Although LLMs are getting commoditized, I suspect they'll remain an order of magnitude more expensive than traditional server and database fees. It is kind of like serving food buffet style or ala cart; there is tension between the consumer and supplier as unit pricing becomes more of a factor. Usage pricing, paying for what you use, seems much more aligned for both parties.
Good morning. I read the translation into Spanish made by Salvador Lorca of one of your articles, and I liked very much.
Can I do the same with this one, also with links and a description?. For my newsletter "dineros" ("money") in Substack, who has subscribers and followers interested in financial issues.
Many thanks in advance.
If it wasn’t, maybe we should just call it AR, no?
Most of my portfolio are now “re-occuring”
I’m still surprised there hasn’t been more (visible) pressure yet to cut costs at companies paying such hefty sums for their SaaS software.
I can see the narrative shifting a little, but price points are currently very clearly linked to the ARE targets set. It’s surely going to burst in a big way?!