Discounts

• By
• Chris Burgner

  Chris Burgner

  12+ years of experience, most recently as a Director of Finance at Intercom.

  

In creating the logic for ARR reporting, it’s better to err on the side of conservatism. Reporting a higher number than you might get credit for by investors or the public market is a bad trade in the risk-reward spectrum.

That’s why adjusting for discounts in the ARR Build is important. However, not all discounts are created equally. There’s nuance in determining which should be removed and which can be ignored.

Let’s explore the differences based on the discount window.

Do you handle discounts applied in perpetuity (forever) on a fixed dollar or percentage-off basis?

We see many of these in custom pricing plans offered to early/legacy customers or those with “friends and family” type coupons.

This one’s pretty straightforward. You should always remove these from your ARR calculation because they happen on a recurring basis, like the revenue you’re annualizing.

How do you handle fixed-term discounts?

Discounts with a fixed start and end date are more open to interpretation because they’re recurring but only for a certain amount of time, e.g., 1, 3, 6, or 12 months. Common sources of these discounts are marketing promotions (e.g., three months free if you use code “xyz” at checkout), start-up plans (e.g., 50% off or a fixed price plan), or first-year discounts on multi-year Sales contracts.

In the spirit of conservatism, it’s better to remove these from your calculation and recognize Expansion when the discount expires. This also ensures you assign the right value between business impact and compensation targets for the company’s go-to-market teams.

How to handle credits and one-time adjustments?

The last bucket of discounts comes from credits and one-time adjustments. These are one-time and do not relate to the underlying subscription or product bundle. Examples include compensating a customer for a service outage or waiting too long in the customer support queue.

We do not recommend adjusting for these in ARR for two reasons:

1. The credits aren’t related to the purchase experience or the customer’s subscription
2. They are not controlled by the teams responsible for revenue (e.g., Sales, Marketing)