👋 Hi, it’s CJ Gustafson and welcome to Mostly Metrics, my weekly newsletter where I unpack how the world’s best CFOs and business experts use metrics to make better decisions.
Net New ARR measures changes in Total ARR from one period to the next.
Total ARR = big blue bars. Net New ARR = orange lines showing the delta from period to period
If you’ve ever seen an ARR waterfall, this is what goes on between the lines.
Sounds simple in theory. But in practice, there are a thousand little feet kicking under the surface. It’s not just a single number, but a combination of different revenue flows that provide insight into how well a company is growing.
To “double click” on the chart above (punches self in face), the orange line can be broken into sub components
That’s why I brought in an expert to help with today’s post - Bobby Pinero - founder and CEO of Equals. After experiencing the pains of being the first finance and data hire at Intercom, wrestling messy transaction data from Stripe, ERPs, and Data warehouses, he started Equals to solve the ARR problem. Take it away, Bobby:
Source: Equals
Net New ARR is the pulse of your business. You can tell where you are gaining or losing ground by pinpointing the ways that ARR shifts from one period to the next.
Mechanically speaking, Net New ARR is made up of different categories of added and lost revenue:
Net New ARR = Gross New ARR + Expansion + Contraction + Churn + Restart
Added Revenue
Gross new:
Started a new subscription
Expansion:
Upgraded to a higher plan
Increased seat count
Bought an additional product or feature
Restart:
Restarted a previously cancelled subscription
Lost Revenue
Contraction:
Downgraded to a cheaper plan
Reduced seat count
Removed add-ons
Churn:
Cancelled subscription
Downgraded to free plan
Gross New
Gross New is crucial in the ARR Build for two reasons:
When a customer’s subscription starts determines what cohort they are a part of. (Cohort is a fancy word for a “group” based on similar characteristics.)
Gross New makes up the majority of Net New ARR for early stage companies. As the business grows, the balance shifts, and a higher concentration of Net New ARR comes from Expansion ARR from existing customers. Knowing this mix goes a LONG way in determining the accuracy of your forecasts.
Gross New is a measure of business from new customers walking in the door. The pace and size at which they walk through the door matters, as it dictates how hard the other levers within Net New ARR have to work to make the money printer go brrrr.
Ways to change Gross New:
Increase lead volume
Improve funnel conversion
Increase the starting price point
Expansion and Contraction
Everything outside of Gross New ARR is influenced by existing customers.
The main thing to keep in mind is that in order for a customer’s actions to land them in the Expansion or Contraction buckets, they must hold an active subscription (which means they can’t be in the cancellation bucket).
You want to intimately understand these movements between the lines because acquiring customers is expensive. It’s always more cost effective to keep an existing customer around, and potentially even upsell them, rather than hunting for new customers.
Furthermore, existing customers actually do a lot of the work for you in recruiting net new customers. They tell their friends, they tell their colleagues, they tell their mom and dad. And that defrays your customer acquisition cost.
Ways to Change Expansion:
Pricing that better captures the value customers derive
Launch new products and offerings
Upsell and cross-sell campaigns
Ways to Change Contraction:
Improve onboarding and activation of feature sets most commonly adopted
Avoid overselling in the initial sale
Expansion is often fueled by a deep understanding of customer needs, where effective cross-sell and upsell strategies target gaps in the customer’s experience within your product suite.
Reducing churn and contraction often relies on proactive Customer Success teams, who reach out to users before they consider downgrading or leaving altogether. The earlier you intervene, the easier it is to stop revenue from walking out the door.
Churn
Churn is usually defined as the point in time when a customer cancels their last remaining subscription. Similar to Gross New ARR, the exact definition depends on where you draw the line on what constitutes a “customer” for the purpose of reporting ARR. But it always involves cancellation at some level.
Churn is tough. Also, CJ cried alone in his office after putting this gif in.
In Enterprise settings, churn might happen at a slower pace, but once a contract is gone, it's harder to restart. Meanwhile, in PLG models, customers might churn and return in much shorter cycles due to flexible monthly subscription terms.
Ways to change Churn:
Just, like, do betterShore up key product gaps / issues
Improve onboarding and activation
Modify pricing and packaging
Some companies use machine learning models to predict churn before it happens, using behavioral data like login frequency or support ticket volume. If churn happens, it’s important to weigh the lifetime value of a customer against the cost of winning them back, as restarting that relationship often comes at a high acquisition cost. Speaking of winning them back…
Restart (Resurrection) ARR
Restarts happen when a customer who had previously churned (cancelled their subscription or downgraded to a free plan) starts a new paid subscription.
The question companies always wrestle with is at what point does this constitute Gross New ARR again? Usually after they’ve been gone for over a year.
Therefore, Restart ARR is when they come back from the dead within a 12 month period. This, of course, is less prevalent in Enterprise businesses who lock customers in 12 month contracts.
Ways to change Restart:
Don’t let them leave in the first place
Increase win back campaigns
Close known product gaps
Persistence
Restart is less important as a performance indicator, and more about hygiene. Differentiating between win-back customers and those joining for the first time helps eliminate false signals around Gross New and leads to better top of the funnel reporting.
That being said - you want to stay on top of the reasons why customers come back (and more importantly, why they left in the first place.)
Following the Money
By closely monitoring the headwinds and tailwinds to your Net New ARR, you can better predict future growth and adjust your go-to-market strategies accordingly. That means allocating resources to the places where you’ll get the most bang for your buck.
Tracking changes in Net New ARR closely also forces you to be honest as to where you are in your business cycle. It’s difficult to keep your growth rate the same year-on-year as you become larger (see: revenue endurance score). At some point the base becomes so big that the majority of future growth comes from your base (which is a good problem to have if you’ve made it to that point and have sticky, happy customers).
Finally, understanding Net New ARR will better position you for fundraising. It’s common wisdom that you want to raise when you Net New ARR is accelerating from one period to the next. This represents increasing traction in your business.
Net New ARR is the closest you can come to the daily pulse of the business. Stay on top of it if you don’t want to miss a beat.
