Yes, ARR is Dead ☠️

If ARR is dead then we need to rethink all traditional software metrics and benchmarks

👋 Join 31,000+ subscribers learning more about finance and operations at tech companies. Stay up to date on the latest tech news, trends, and insights.

---

Today’s Sponsor: NetSuite

AI is advancing faster than any previous technology shift, and its ability to impact nearly every business function makes adoption both exciting and challenging.

Get your guide: learn how to become an AI champion and go beyond mastering technical skills by developing a mindset centered on continuous learning and cross-disciplinary collaboration.

---

Death of ARR

AI is killing many things and it has accelerated the death of the traditional concept of ARR.

Why should we care if ARR is dead?

If ARR is dying then so are most of the traditional software metrics and benchmarks that we rely on to drive decisions.

The issue is that companies are operating as if nothing has changed — they treat everything as ARR and are using the same financial metrics as before.

But ARR in 2025 is MUCH different than ARR from just a few years ago. Companies that blend non-traditional ARR types will wake up one day and realize their unit economics are significantly different than they expected. Hint: almost all companies will see their non-traditional ARR growing because of how software is changing due to AI (among other things).

What Made ARR Special?

Here are some things that have made ARR so valuable:

• Revenue is actually recurring

• Highly predictable

• Customer churn is low

• Minimum costs to retain customers

• Customers naturally expand

• High gross margins

As software has changed (and particular with the introduction of AI) there has been significant definition creep into “ARR” because every company is incentivized to maximize “ARR” since that is what investors care about.

As the meaning of ARR has become diluted, so has all the other related software financial metrics. And this dilution of value is only accelerating today.

The death of ARR doesn’t mean the death of software though.

But…we need to stop blindly applying these generic metric definitions to all revenue since not all software revenue has similar unit economics today. It is misleading to blend them all together.

Both operators and investors are failing to grasp the change…

ARR Definition Creep

True & Pure ARR

The truest form of ARR is when a customer locks into annual (or greater) contracts for a committed amount of spend. And when the contract ends the customer will either churn or they will renew for at least another year (and typically with expansion revenue)

And most importantly, customer retention is predictable and high.

Definitely NOT ARR

Some things are clearly not ARR despite many people still trying to include them.

The clearest example is one-time fees, like professional services, should never be included in ARR.

The Messy ARR

There is A LOT of revenue that doesn’t fit cleanly into either of the above buckets — this is the “messy ARR”.

There is a significant (and quickly growing) amount of revenue in this messy middle.

I have seen board decks with 5+ caveats about ARR. If you have lots of caveats and/or different methods for defining ARR based on your products then maybe you shouldn’t blend them all together for other metrics.

Many companies are seeing their “messy ARR” become larger than “true ARR” as it accelerates because of how software is changing.

Trying to shove all revenue into one metric (ARR) to base all other metrics on is no longer the right answer in 2025. Blending all this ARR will negatively impact decision making and the metrics we use to evaluate companies.

Public Company ARR Definitions

Public companies often don’t disclose much about ARR (if anything at all) and I expect a growing number of public companies to disclose even less on ARR given its diminishing value.

I dug into Ordway’s ARR Public Company Research which is the most detailed breakdown of public company ARR definitions I have seen. As of the date of this report in 2023:

• Only 50% of companies defined ARR

• Only 29% of companies reported ARR

• 80% of those that defined ARR have unique ARR definitions!

As you can see below, there are A LOT of judgements that have to be made in defining ARR.

Source: Ordway

This report was from 2023 and the last two years have added significantly more variability as a result of AI.

AI Accelerates ARR’s Death

While not all purely AI-driven, below are three things that are also diluting that value of ARR as a metric:

1. Usage-based pricing (UBP)

Seat-based pricing is also dying thanks in part to AI.

ARR and its related metrics made a lot more sense when seat-based pricing accounted for the overwhelming majority of revenue.

But that is changing. We have A LOT more pricing models today and non seat-based pricing is dominating future growth.

Should usage-based pricing be included in ARR?

It depends…

UBP is a billing model decision. It does not typically impact the actual software being sold. Customers just now have the ability to churn (or expand) whenever they want. Similar to traditional SaaS though, if product-market fit isn’t achieved then retention will be weak.

The problem with UBP is it’s less predictable and harder to forecast, but that doesn’t necessarily mean it shouldn’t be considered ARR.

If it meets the intent of ARR then I have no problem including it. But the issue is that many UBP products are less sticky so retention is lower since customers can churn whenever they want.

2. AI experimental revenue

ERR = Experimental Runrate Revenue

The argument for needing a new term is that there is lots of “experimental” revenue in AI right now. Companies are purchasing AI to test it out, but there is very little commitment since many companies are just experimenting with AI (so churn will be high).

If annual churn is 40% then it is hard to justify calling it “recurring” revenue. Similar to the first point, high customer retention is what really makes ARR special.

I would NOT lump new AI revenue that is pay-as-you-go into the same ARR bucket as traditional seat-based annual contracts. They are very very different. But I see lots of companies doing some version of this. It is dangerous…

3. Higher churn in traditional SaaS

The contractual guaranteed minimum spend of customer contracts is never what made ARR special (unless companies signed 5+ year customer contracts). Annual contracts just decrease the number of opportunities that customers have to churn.

If most customers churn after one (or even two years), do you have ARR?

The much bigger risk today is that churn will continue to increase for many companies:

• Switching costs decrease

• Build vs Buy decision becomes harder (because of AI)

• Pricing pressure increases due to increased competition

• Software budgets shrink

ARR is meaningless unless it is also highly profitable at some point.

Now What?

Folks need to actually start using their brains rather than defaulting to the same metrics and benchmarks we have been using for a decade.

Start by being honest about your “ARR” and your actual unit economics.

Below are two things I encourage every company to do:

1. Broken Metrics

Many of your metrics are starting to break because of “messy ARR”. Segment different types of revenue and determine what metrics are important for each segment (hint: they probably shouldn’t all be the same!)

For example, growing ARR on an 85% gross margin product that has low churn is MUCH different than growing ARR on a 50% product with higher/unknown churn rates.

• Should commission rates be the same?

• What metrics do you focus on?

• Do your assumptions still hold up?

• Are you relying on outdated benchmarks?

The answer is likely different for the different products and segments.

2. Focus on CAC Payback

In times of high volatility and uncertainty I am focusing on CAC Payback Period. I suggest you do the same.

CAC Payback Period is a risk-based metric that tells you how long it takes to breakeven on your costs to acquire a customer.

With churn increasing and my ability to forecast churn decreasing, I want to lower the CAC Payback Period as low as possible.

Final Thoughts

If you takeaway nothing else…re-evaluate your ARR definition and related key financial metrics.

Every company should clearly define all metrics for all stakeholders (management, board, etc) and stay consistent. If a definition change is needed then make sure everyone is aware of the change.

It’s OK that ARR is dead, but we need to update how we evaluate the financial health of our revenue.

*Sign up for the OnlyCFO webinar series as we tackle the future of ARR and the impact on SaaS metrics in our next webinar! Email me with your questions

---

Footnotes:

• Download → Learn how to become an AI champion

• Check out OnlyExperts to find offshore accounting resources. They have some amazing talent for 20% the cost of a U.S. hire