As a SaaS CEO, it’s tempting to focus solely on commercial growth metrics like new customer acquisition and sales targets. After all, these numbers are the lifeblood of any growing business. However, focusing only on these can lead to a skewed understanding of your company’s overall health. One often overlooked but incredibly important metric is Net New Annual Recurring Revenue (ARR). Here’s why it’s crucial to keep Net New ARR on your radar, even as you scale up and beyond $50MM in ARR.
Understanding Net New ARR
Net New ARR represents your annual recurring revenue growth, accounting for new revenue from new customers and expansions minus revenue lost from churned customers. This metric gives a true picture of your company’s revenue growth.
The Importance of a Balanced Focus
Example: Early Stage Startups
In the early stages, it’s common to be hyper-focused on metrics that showcase growth, like Monthly Recurring Revenue (MRR) and new customer sign-ups. These metrics are essential for demonstrating traction to investors and stakeholders. However, ignoring Net New ARR can be detrimental even in these stages. For instance, if your churn rate is high, the revenue you lose might overshadow the gains from new customers, stunting your growth.
Example: Scaling Up
Consider a SaaS company scaling from $10MM to $50MM in ARR. It’s a critical phase where the focus often shifts to rapid customer acquisition and market penetration. During this phase, monitoring Net New ARR ensures that the revenue growth is sustainable and not merely a result of aggressive sales tactics that might lead to high churn rates later on.
Customer Acquisition vs. Revenue Health
While it’s essential to bring in new customers, the cost of acquiring them (Customer Acquisition Cost – CAC) must be balanced with the revenue they generate over their lifetime (Customer Lifetime Value – CLV). Net New ARR provides insights into whether your sales and marketing efforts are not only attracting new customers but also retaining them and expanding their value over time.
Example: Retention Strategies
A SaaS company noticed their Net New ARR was plateauing despite a steady influx of new customers. On closer inspection, they found that their churn rate was rising. They revamped their customer success programs, focusing on proactive customer support and tailored upsell opportunities. As a result, their churn rate dropped, and Net New ARR began to climb again.
Why Investors Care About Net New ARR
Investors are keenly interested in Net New ARR because it offers a clear picture of revenue momentum and long-term sustainability. A consistent growth in this metric can significantly boost investor confidence.
Market Reference: According to an article by ProfitWell, “Tracking Net New ARR helps businesses understand if their growth is sustainable and not just a temporary spike.”
The Role of Net New ARR in Forecasting
Accurate revenue forecasting is critical for strategic planning. Net New ARR serves as a reliable predictor of future revenue, helping CEOs make informed decisions about hiring, resource allocation, and product development.
Example: Strategic Planning
A SaaS company aiming to double their ARR over three years relied heavily on their Net New ARR trends to forecast their growth. By understanding this metric, they identified key areas for investment, such as enhancing their product features that drove higher upsells and customer retention, ensuring a steady increase in their recurring revenue.
Competitive Edge and Market Agility
In the competitive SaaS landscape, agility is key. Monitoring Net New ARR allows CEOs to quickly adapt to market changes and customer needs. This agility can be the difference between leading the market or lagging behind.
Learn more here: Salesforce’s blog highlights, “Keeping a close eye on your Net New ARR can help you stay ahead of market trends and adjust your strategies proactively” (source).
