By: Diamond Innabi, Senior Analyst
Following my previous blog, “Understanding ARR: Terms You Need to Know,” and my colleague’s blog, “How to Properly Calculate Customer & ARR Churn,” I wanted to show how these two very important factors come together.
Now that you are all experts on churn and ARR, it is important to understand the ebbs and flows of ARR and customer count data. In SEG’s world, a straightforward way to illustrate this data is through an ARR bridge and a customer count bridge.
An ARR bridge depicts changes in a company’s ARR during a given year and includes: starting ARR, new ARR, lost ARR, and any ARR expansion or contraction of the existing customer base during the year.
Customer Count Bridge:
A customer count bridge depicts changes in a company’s customers during a given year and includes: starting customer count, new customers, and lost customers.
Let’s say Company X ended 2016 with 100 customers worth $1,000,000 in ARR. This would be the starting customer count and ARR for 2017. Let’s also assume Company X brought on 20 new customers worth $300,000 in ARR, lost 10 customers worth $70,000 in ARR, a portion of existing customers collectively expanded by $100,000, while other existing customers collectively contracted by $30,000. The net result is Company X would have ended 2017 with $1,300,000 in ARR and 110 customers.
This is a very well performing company. Why is that? Well, take a look at the graphs below.
Company X is performing well because:
- New customers grew ARR by 30%.
- The Company brought on larger customers (average new customer ARR was $15,000 = $300,000 new ARR/20 new customers) compared to the average customer size from 2016 (average customer ARR was $10,000 = $1,000,000 in ARR/100 customers).
- Lost ARR retention was 93%, gross ARR retention was 90%, net ARR retention was 100%, and customer logo retention was 90%.
- The Company lost smaller customers (average lost customer ARR was $7,000 = $70,000 lost ARR/10 lost customers) compared to the average customer size from 2016 ($10,000 in ARR).
- The existing customer base expanded (10% expansion) more than it contracted (3% contraction), providing 7% YoY net growth from Company X’s existing install base.
Simple bridges like those above can provide very valuable insight into how well a company is performing overall, the effectiveness of a sales and marketing team in bringing on new customers, how well a company is retaining customers, and how existing customers are utilizing the solution.
On the reverse side, bridges can also show when a company is not performing well and highlight key areas for improvement. A company can be growing but still have serious underlying issues. Let’s take a look at another example:
Company Y ended 2016 with 100 customers worth $1,000,000 in ARR (just like Company X). Let’s also assume Customer Y brought on 50 new customers worth $600,000 in ARR, lost 40 customers worth $400,000 in ARR, a portion of existing customers collectively expanded by $170,000, while other existing customers collectively contracted by $70,000. This means that Company Y would have STILL ended 2017 with $1,300,000 in ARR and 110 customers just like Company X. However, Company Y isn’t performing as well as it could be.
Customer Y’s performance can be improved:
- New customers grew ARR by 60%. However, the Company lost 40% of ARR through lost customers which nets out to LESS net new customer ARR compared to Company X.
- Lost ARR retention was 60%, gross ARR retention was 53%, net ARR retention was 70%, and customer logo retention was 60%.
Though both Company X and Company Y ended with 110 customer and $1,300,000 in ARR, Company X performed much better and more smoothly than Company Y. Though Company Y brought on an enormous number of new customers, they lost close to the same amount… It’s much cheaper to retain existing customers than acquire new customers, and Company Y will likely spend much more money over time to fill the “leaky boat.”
These bridges can help Company Y understand where they can improve and could possibly have a tremendous impact on future operations of the Company.
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Originally Published July, 2018