ARR as your North Star

• By
• Bobby Pinero

  Bobby Pinero

  15+ years of corporate finance experience, currently co-founder at Equals and board member at Intercom.

  

You don’t have to explain to a local restaurant that it will live or die by the number of paying customers it serves. You don’t have to explain to an airline that its ability to stay operational wholly depends on its ability to sell airline tickets. You don’t have to convince a car dealership that it needs to sell cars.

Yet, for some reason (thanks venture capital!), you have to explain to technology founders and their Finance and Data teams that revenue matters. Believe it or not, some would tell you otherwise.

So, before we go any further, let’s establish that ARR is the most important metric in any subscription business. It’s the lifeblood of the company, how investors will ultimately value it, and where the rubber meets the road with your customers.

It’s the most important metric because it underpins every crucial question in your business. You know how you should always put your oxygen mask on before helping others when you fly? It’s the same thing with understanding the dynamics of your business—understand your ARR first before trying to answer other questions. Because if you don’t, your company will die. Metaphorically, of course.

Nailing ARR reporting will help keep your business breathing. It’s the foundation for answering nearly every other question in your business. Practically speaking, it’s the very first thing you’ll want to segment by when asking those questions.

For example, as we started building the world’s first “connected spreadsheet”, we wanted to know, “What data sources are users connecting Equals to?”. The next, most interesting, and most important question we wanted to answer was, “Of the users who connected data source X, what percentage were paying for Equals vs. those that connected data source Y?”. And from there, “What plan are they on?”, “How much do they pay?” and so on and so forth.

Still not convinced? OK. Let’s say you’re trying to figure out which lead sources or marketing channels are working. Your first and most important question will be whether those leads convert to paid customers. If so, for how much? And how long do they stick around?

Need one more? Too easy. When determining how to measure onboarding and define user activation, you’ll want to ensure that whatever you’re looking to drive users to do in your product correlates nicely with them becoming a paid and retained customer.

You get the picture.

Now, here’s the thing: Your ability to set up the right metrics—funnel and marketing channel performance, product engagement and activation, and everything in between—is entirely dependent on having rock-solid ARR reporting in place. Get it in place first so your business doesn’t sink.

With that out of the way, here’s what you can expect in the chapters to come. We’ll show you:

What great ARR reporting looks like

Drawing on our experience, we’ll explain how to break ARR down into its component parts in order to connect reporting back to the teams that can influence outcomes. We’ll also cover the various ways we like to look at cohorts, and lastly, how we think about forecasting ARR.

How to work through the most challenging set-ups

From wrangling your data to applying business logic and setting up a source of truth, we’ll give you practical guidance to consider. Every business is different, so we don’t have hard and fast rules. No single book can tell you exactly what to do but we’ll give you a framework to apply. If you need more specific help or want us to do it for you, we’ll tell you how to do that too.

How to operationalize and make the most of ARR reporting

Once you’ve established what great ARR reporting looks like and how to set up the underlying infrastructure, you’ll be ready to share your company’s view on ARR with your broader team. We’ll share some of our best practices to ensure that it’s a success.

What benchmarks for (healthy) ARR growth look like

Overall, we tend to be skeptical about benchmarks. They’re dangerous when applied without context and very specific filters. That said, we provide some high-level benchmarks surrounding ARR and connected metrics that have proven helpful for us.

And, one more thing…

We share a curated collection of our favorite and most valued resources on the topic of ARR.

Sound good? Then let’s jump in!