The ARR trap and the zero-sum fallacy

On planet Saas, Annual Recurring Revenue (ARR) is typically treated as the ultimate metric. It’s the north star for investors, the fuel for growth, and the measure of a company’s health. But when your VCs are breathing down your neck, maximising ARR can become a trap. 

How it begins

The cycle begins with a seemingly logical decision: close that deal so we hit our ARR target. A sales team, under pressure to hit ambitious ARR targets, might sign a customer who isn’t a perfect fit (aka is not very likely to renew). They may sign up a customer that really is just experimenting and not ready to build a system aimed a production usage. They might agree to terms that don’t include the necessary implementation services, onboarding support, or training that would ensure the customer’s success. The logic is simple (or rather simplistic): any ARR is better than no ARR. You can always figure out how to make customers succesful later.

But this is where the trouble starts. The customer, lacking the support they need, struggles to adopt the software and integrate it into their business. They don’t see the full value of the solution and, as their renewal date approaches, they become a prime candidate for churn. The recurring revenue turns out not be renewing. (Note that by definition nothing is recurring until it actually recurred, so by that dictionary logic first year revenue really never could be ARR.)

This increased churn puts a new kind of pressure on the sales team. With existing ARR leaking out, they must not only meet their original growth targets but also compensate for the losses. This intensifies the pressure to close deals, leading to even more compromises on customer fit and support.

This spiral accelerates, and soon, sales growth slows dramatically while churn rates skyrocket. The company is running in place, trying to fill a bucket with a massive hole in the bottom. 

How to make it stop

Breaking this vicious cycle requires a fundamental shift in mindset. Instead of prioritising ARR at all costs, a company must prioritise customer success at all costs. This means making some painful decisions that might seem counterintuitive in the short term but will pay massive dividends in the long run.

1. Qualify Harder and Qualify Out: Be ruthless in your qualification process. If a customer isn’t a good fit, or if they aren’t willing to invest to ensure a successful implementation (YES, you should discuss extensively HOW and WHEN they plan to go-live, not with your product, but with the solution their business needs), walk away from the deal^.. Don’t be afraid to say no. Sell what they’re actually in the market to buy.
2. Engage the implementation and customer service teams early for success: Ensure every deal includes the right amount of implementation, training, and support services to get the customer up and running successfully. These services aren’t just an add-on; they are the foundation for a long-term, profitable relationship. They’re an insurance policy on the customer’s job and the project’s success. Involve those teams early in the deal cycle to show the customer that a successful implementation matters to you and you will gain more trust than any product demo or promises from product management can achieve.
3. Align Incentives: Align your sales team’s compensation with customer retention and expansion, not just new logo ARR. This encourages them to focus on closing deals that will last, not just deals that will close. You want them to see a higher services commission as a higher chance of winning a deal.
4. Learn the ARR vs services zero-fallacy lesson when selling enterprise software. Most customers, particularly when you’re selling to the information technology (IT) organization, are professional buyers — this isn’t their first rodeo, they know that enterprise software requires services, and they budget separately for it. So don’t try to squeeze as much as you can into the software budget, but go hunting for that implementation budget, verify if it will suffice to make your customer successful.

The road to sustainable growth is paved with happy, successful customers. By shifting your focus from maximising ARR to maximising customer value, you can break free from the vicious churn cycle and build a resilient, profitable, and enduring SaaS business. After all, professional services and customer success are there to maximise ARR, just like the rest of the company.