“The Death of ARR as we know it.”
"A common headline across many LinkedIn feeds in the last 12 months. But the reality is far more nuanced and far more encouraging in my opinion. ARR as a ubiquitous software metric might be dying. But with it, software as an investment category is entering a new era — not of decline, but of acceleration.” – Finn O’Driscoll, Partner, Clearwater
For years, investors have been drawn to software for two core reasons: revenue recurrence and low marginal cost of sale, driving high margins and cash conversion at scale. The move away from fixed per-seat pricing to volume or outcome-based models hasn’t changed either of those fundamentals. What has changed is the cadence of customer evaluation.
Where renewal used to be an annual event, it’s now a monthly, even daily, vote of confidence. That sounds risky. But for providers delivering real, demonstrable value, this is value accretive. Inter-year recurrence can be just as strong, if not stronger. Why? Because outcome-based pricing aligns cost with customer success. It's not just sticky, it’s symbiotic, and supportive of what connects the very best providers we work with: a strategic partner with deep vertical and workflow expertise solving core customer problems (playing into the ‘service as a software’ value proposition shift).
Of course, investors must adapt. Assessing value in this new paradigm requires new lenses, including:
- Understanding seasonality in volume or performance-driven models, and therefore working out the right underlying measurement period for Revenue, EBITDA etc
- Increasing the cadence and depth of customer success assessment — retention is more fragile when customers can walk at any time. So real-time troubleshooting become even more critical in the new world
- Focusing on NRR over GRR as the most insightful measure of retention and value delivery
- Moving beyond ARR to more pricing-model appropriate measures of run-rate performance that dissociate the simplifying (and often lazy) use of ARR as the North Star for quality of earnings and resilience. ARR has always primarily been a measure of scale, not value. Value still lives at the intersection of growth and profitability (think Rule of 40 or the Rule of X)
Software’s fundamentals haven’t changed. But its pricing models have, for the better, as they continue to adapt to best align with changes in product development, delivery, usage and success.
The future of software is faster, more dynamic, and more aligned with customer outcomes. For investors willing to embrace this shift, and adapt their metrics and mindset, the opportunity is just as compelling as it’s ever been.
The upside? Enormous.
Volume and outcome-based models can help reduce one of the biggest challenges providers have faced since the investment peak of 2020-22: new logo buying friction. Most providers have been impacted by materially extended sales cycles affecting their pipeline conversion. These ROI focused models accelerate sales conversion. And once in, the potential for Net Revenue Retention (NRR) expansion is greater than ever. Unlike the seat-based model, where product enhancements are too often bundled in or devalued in a hyper-competitive market, outcome-based pricing enables providers to monetise real, incremental value. We’ve seen that as game-changer for both pricing power and product development ROI in our highest-growth clients.
These new models also sharpen focus on Ideal Customer Profile (ICP). When pricing reflects usage or success, providers quickly learn who their best-fit customers are, and who aren’t. This leads to better segmentation, smarter product-market fit, and leaner go-to-market strategies.
It all echoes a familiar story: the shift from perpetual license plus maintenance to SaaS subscription models more than a decade ago. Back then, many feared giving up the stickiness of on-premise software. But the outcome has been clear, a boom in software growth and valuations that redefined the software industry. This transition is likely to be no different.
Of course, investors must adapt. Assessing value in this new paradigm requires new lenses, including:
- Understanding seasonality in volume or performance-driven models, and therefore working out the right underlying measurement period for Revenue, EBITDA etc
- Increasing the cadence and depth of customer success assessment — retention is more fragile when customers can walk at any time. So real-time troubleshooting become even more critical in the new world
- Focusing on NRR over GRR as the most insightful measure of retention and value delivery
- Moving beyond ARR to more pricing-model appropriate measures of run-rate performance that dissociate the simplifying (and often lazy) use of ARR as the North Star for quality of earnings and resilience. ARR has always primarily been a measure of scale, not value. Value still lives at the intersection of growth and profitability (think Rule of 40 or the Rule of X)
Software’s fundamentals haven’t changed. But its pricing models have, for the better, as they continue to adapt to best align with changes in product development, delivery, usage and success.
The future of software is faster, more dynamic, and more aligned with customer outcomes. For investors willing to embrace this shift, and adapt their metrics and mindset, the opportunity is just as compelling as it’s ever been.
Recent Software Transactions
Not just numbers on a balance sheet, our transactions represent over 20 years’ commitment to our clients’ future. Helping them change the game. Even before it was ready to be changed.
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Author
Finn O'Driscoll
Partner
I have over ten years of M&A experience advising high-growth technology businesses, founders, management teams, and corporate investors. I lead Clearwater’s software practice and am passionate about contributing to the continued growth and development of the European software industry alongside the talented team here at Clearwater. I also have extensive transaction experience across other technology verticals including IT Managed Services, Digital Transformation, B2B Data, and Information Services. I have transacted to and for many leading international strategic and private equity investors including Vista Equity Partners, Macquarie Capital, ECI Partners, Inflexion, Bowmark, EMK, Livingbridge, LDC, and Tenzing.
