Overages

• By
• Chris Burgner

  Chris Burgner

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

  

Overages are usage in excess of the customer’s contract. They can apply to seat or usage-based pricing models. A quick example of overages might be if a customer signed a contract for 10 seats but currently has 12 seats in use.

Tracking overages is important because it gives you a sense of how much of your ARR is fixed (i.e., under contract) vs. variable. You may also charge different rates for usage within the contracted amount (through discounts) vs. in excess (through premiums).

There’s a quick, two-question test to see if this applies to your business:

1. First, do you offer annual contracts?
2. Second, can customers increase their usage beyond the contracted amount without signing an updated contract?

If you answered yes to both questions, you should read the following considerations carefully to determine how you want to handle overages in your ARR reporting.

How long do customers typically remain in an overage state once they are incurred?

Erring on the side of caution suggests not including overages, but the duration can help guide your decision if you’re on the fence. If customers stay in an overage state past their renewal period, you can probably get away with including them. The effect here is just recognizing the Expansion earlier.

Is it more common for customers to move in and out of overages, or do they tend to stay there once they’re in that state?

If customers tend to move in and out of overages, it’s safer not to include that in your ARR calculation. Instead, you might want to focus on incentivizing your Sales team to bring those overages under contract before the customer’s usage comes back down.

How many of your customers are in an overage state, and what does the overage spend represent in terms of your total ARR?

If most of your customers are in an overage state and tend to stay in that state for a long time, you’re probably safe to include this in your ARR calculation. However, we advise you to frequently monitor usage patterns across your customer base, as this variable revenue can expose your business, especially in a changing economic environment.