What to Do When Your SaaS ARR Goes Down
In the world of SaaS, there are two major metrics that dictate a company’s success: Annual recurring revenue (ARR) and customer churn.
Churn is the rate at which customers leave a company, and ARR is the amount of revenue a company generates from its existing customer base. When your ARR goes down, it can be a sign that your company is facing some major challenges.
If you’re a SaaS business and your ARR drops below a certain point, you need to take immediate action to correct the situation. Why? Because if your ARR falls too low, it could mean that your business is in danger of shutting down.
A recent study found that businesses with below $1M ARR are five times more likely to fail than those with an above $10M ARR. And while there are many factors that contribute to a company’s success or failure, having a low ARR is definitely not a good sign.
What Is ARR?
If you’re a SaaS company, then your ARR is everything. It’s the lifeblood of your business and if it starts to go down, it can be extremely worrying.
So what is ARR? Simply put, it stands for annual recurring revenue. In other words, it’s the amount of money that you can expect to receive on a yearly basis from your customers who are subscribed to your service. The calculation is simple: Divide your sum contract cost by the number of service years. If a subscriber, for example, signs a 10-year contract for $800, divide $800 by 10 for an ARR of $80 per year.
Many people believe that SaaS companies should be valued on their ARR, as this metric shows the predictability of a company’s income.
Why Does ARR Matter?
ARR is an important metric for businesses that use or are considering using SaaS. This metric is important because it provides a measure of how much revenue a company can expect to bring in from its recurring customer base each year.
There are a few reasons why measuring ARR is so important for SaaS companies as follows:
First, ARR provides a clear picture of your recurring revenue streams. This information is essential for forecasting future growth and understanding which areas of your business are performing well.
Second, tracking ARR can help you identify trends in customer behavior. This data can be used to make decisions about pricing, product development, and marketing strategies.
Finally, measuring ARR can help you benchmark your performance against other SaaS companies. This information can give you insights into where you need to improve and how you can better compete in the marketplace.
Generally, a high SaaS ARR means that a company’s subscription base is generating a lot of revenue and that it has been successful in attracting and retaining customers.
A low SaaS ARR could indicate that a company’s subscription base isn’t generating enough revenue or that it is losing customers at a high rate. Businesses should track their SaaS ARR over time to see whether it is increasing or decreasing.
Reasons Your ARR Might Go Down
If your ARR falls too low, it could impact your ability to continue operations, and you might have to make tough decisions like downsizing your team or even shutting down the business altogether. There can be various reasons why your ARR might suddenly go down. Some of which are as follows:
Your pricing model isn’t effective
As the subscription economy has grown, so too have the options for pricing models. While there are many ways to price a product or service, not all of them are effective. In fact, an ineffective pricing model can be one of the reasons for a declining SaaS ARR.
There are three main types of pricing models: tiered, flat-rate, and usage-based. Each has its own advantages and disadvantages. Tiered pricing is often seen as the most flexible option, but it can also be confusing for customers. Flat-rate pricing is simple and easy to understand, but it doesn’t offer much room for customization. Usage-based pricing is based on how much the customer uses the product or service, which can be difficult to track and manage.
A SaaS company’s pricing model has a direct impact on its ability to generate and maintain a good ARR. If a SaaS company’s pricing model is not effective, it will likely struggle to generate and keep customers.
You’re not targeting the right market
You’ve probably heard the saying, “You can’t sell a product to someone who doesn’t need it.” The same is true for SaaS products. You can’t target the wrong market and expect to be successful.
Before you launch your SaaS product, you need to make sure you are targeting the right market. This means understanding your target customer and their needs. It also means understanding your competition and what they are offering.
If you are targeting the wrong market, your chances of success are slim to none. So take the time to do your market research and make sure you are targeting the right people.
You’re losing customers
It’s no secret that the subscription economy is booming, and SaaS is leading the pack. But as a SaaS founder, you can’t afford to rest on your laurels. The competition is heating up, and if you’re not innovating, you’re going to lose customers.
One of the biggest challenges for businesses today is retaining customers in a competitive market. In order to stay ahead of the curve, you need to be constantly improving your product and adding new features. You also need to be proactive about customer service and address any complaints or concerns quickly and efficiently.
If you’re not keeping your customers happy, they’ll soon find another provider that can meet their needs. So make sure you’re always working to improve your product and keep your customers satisfied.
You’re not acquiring new customers fast enough
There are a few reasons why this might be the case. One possibility is that the company’s product isn’t up to par, and as a result, they’re not able to attract new customers at the same rate as before.
Another possibility is that the company’s sales and marketing efforts aren’t effective enough, and as a result, they’re not able to bring in new customers as quickly as they’d like. For example, they might not be attracting the right customers, or their sales team may not be able to close sales fast enough. In either case, the company needs to examine why they’re not attracting new customers at a fast enough rate and make changes accordingly.
Finally, it’s also possible that the SaaS pricing strategy isn’t competitive enough, and as a result, they’re not able to attract new customers at the same rate as their competitors. For example, the company may no be offering the same level of service as their competitors, or they may be charging more for their SaaS product or service.
Your churn rate is too high
If your SaaS company is losing more than 10% of its customers each month, you have a problem.
A high churn rate means you’re not retaining enough customers to grow your business. A high number of churned customers makes it difficult for companies to grow their revenue, as they must continually replace lost customers with new ones.
In addition, high churn rates can be a sign that users are not finding value in the service, which can lead to lower customer retention rates and decreased revenue growth.
Your product isn’t resonating with customers
It could be because your pricing is off, your messaging is unclear, or you haven’t found the right audience. But no matter the reason, if your product isn’t resonating with customers, it’s time to pivot.
When customers don’t find value in a product, they are less likely to renew their subscription or become new customers. This can be due to a variety of reasons, such as the product not meeting their needs, being too difficult to use, or not being affordable.
If your SaaS company is experiencing decreased ARR, it’s important to take a close look at your product and see what you can do to make it more appealing to customers.
One way to determine whether your product is resonating with customers is to look at engagement data. If people aren’t using your product or aren’t engaging with it, that’s a sign that something is wrong.
Another way to determine whether your product is resonating with customers is to talk to them. Ask them what they like and don’t like about it, and see if there are any areas where they feel like you could improve.
You’re not optimizing your sales process
You may have the best product or service in the world, but if your sales process is flawed, you’re going to struggle to make any headway in today’s competitive landscape. For example, the company may no be offering the same level of service as their competitors, or they may be charging more for their SaaS product or service.
Too often, businesses focus on the product itself and neglect the sales process. This can be a costly mistake, as a well-optimized sales process can mean the difference between success and failure.
What to Do if Your ARR Decreases
Your ARR may decrease for a number of reasons. Perhaps your churn rate has increased and your current customer base is not renewing their subscriptions at the same rate as before.
Alternatively, your pricing model may have changed, and you are now collecting less revenue from each customer. Whatever the reason, here are four steps to take if your ARR decreases:
Evaluate the decrease
If you’re a SaaS company and your ARR is decreasing, it’s important to evaluate why. There are several possible reasons for a decrease in ARR, and each one should be evaluated to see if there’s a solution.
One reason could be that you’re not signing up as many new customers as you were before. This could be due to a number of factors, such as competition from other companies, a slowdown in the economy, or a change in your target market. If this is the case, you’ll need to figure out how to increase your sign-ups.
Another possibility is that you’re not retaining as many customers as you used to. This could be due to a poor customer experience, lack of support, or high prices. If this is the case, you’ll need to work on retaining more of your existing customers.
Take corrective action
If your SaaS business is noticing that their ARR is going down, there are some corrective actions that can be taken in order to help turn things around.
One thing that can be done is to take a close look at your pricing model and see if there are any changes that could be made in order to make your product more affordable for potential customers.
Another thing to consider is whether or not you are providing enough value for what you are charging; if not, making some adjustments to your features or offerings could help increase interest and boost sales.
Finally, it is also important to make sure that you are marketing your product effectively and reaching the right audience; if not, revamping your marketing strategy could be the key to getting back on track.
So if your SaaS ARR drops, don’t panic – but do take corrective action. It’s the only way to save your business.
Communicate with your team
Your ARR is down, and you’re not sure why. What do you do? Communicate with your team. By communicating with your team, you can determine the cause of the issue and work to resolve it.
If your ARR is down, it’s likely that customers are unable to access your product or service. This can be costly for your business, as you may miss out on sales and revenue. In addition, customers may leave for a competitor if they are unable to access your product or service.
By communicating with your team, you can identify the cause of the issue and work to resolve it as quickly as possible. This will help ensure that customers can continue to access your product or service, and that you don’t lose any business in the process.
Document your findings
When your ARR goes down, you need to document your findings. This will help you determine the cause of the issue and prevent it from happening again. You may also need to provide documentation to your customers or investors.
Documenting your findings is important for two reasons. First, it helps you track and fix recurring issues. Second, it provides a history of your system’s performance that you can share with others.
Recording data about your system’s performance is easy with the right tools. By using a tool like Datadog, you can collect data on everything from CPU usage to application response times. This data will help you identify and fix problems before they cause an outage.
Having this data also allows you to build a history of your system’s performance. This can be helpful when you need to explain an outage to customers or investors.
Repeat as necessary
Repeat the steps on addressing a declining ARR as outlined above as necessary. You may need to repeat this process more than once. Spend some time with your SaaS product and closely monitor its performance.
When your ARR goes down, there are a number of things you can do to try and increase it. Utilize the tips in this article to help get your business back on track. If you need more tips on growing your SaaS business, make it a habit to check our blog.