What’s the difference between ARR and CARR? No, it’s not a trick question — though, for a lot of scaling businesses, it can feel like one.
Closing the gap between the two is hard. Customers saying they’re going to buy isn’t the same thing as seeing their money in your bank account — and though it seems like that home stretch should be a short one, it can take a frustratingly long time to get customers over the line.
That’s because the final stage of the sales funnel is beset by friction. There are multiple, competing priorities on both sides: your salesperson and their buyer might be keen to move quickly, but does your product team have time to troubleshoot onboarding? And is their CFO ready to sign off on the budget? If not, trial periods and pilots can drag on indefinitely, pushing that first invoice further and further out of reach.
It’s a difficult position to be in. At the mercy of your customers, you’re unable to reliably predict or report on revenue, and that knocks on to your wider financial planning. It freezes your cash flow and, to investors, makes it look like you’re not scaling as quickly as you should be which can make it challenging to secure more funding for growth.
In short, the difference between ARR and CARR is a lot. It’s a seemingly small problem, but one with significant consequences for scaling businesses. So, how can you solve it? There’s no silver bullet, but being smart about contracting can help.
How can contract structure speed up time to revenue?
Selling customers your product is one thing. Getting them sold on it — seeing the value and using it consistently — is another altogether. The fact is that at the point they sign the contract, your customers still aren’t really that committed. Usually, there’s no particular incentive for them to get up and running quickly, or to start using all the functionality that proves your product’s value. That foot-dragging gets worse if you put them on a free trial. If they’re not paying, there’s no urgency, and that can mean onboarding processes that should take a few days stretch to several months unnecessarily.
Structuring contracts so they offer an opt-out period instead of a trial period can get things moving faster. It works like this: you give customers an annual contract, paid up-front, with a break clause that enables them to get a full refund within let’s say 30 days of signing up. The assumption is that very few, if any, of your customers will invoke that break clause. It prevents customers from getting stuck between trial and full contract, incentivises them to really start using a product they’re already paying for, and it means you can start charging them from day one.
There are a lot of other benefits, too. It’s a powerful thing for your sales team to tell customers they’re so confident they’ll love the product, they’re convinced they won’t churn. From the customer’s point of view, there’s more motivation to start using the product straight away. That means they’re more likely to see the value of it, impacting positively on long-term customer satisfaction. Most importantly, it gives you more predictability, more control, and more impressive numbers when it comes to reporting.
What do you need in place to start contracting for speed?
Of course, there are caveats. This contact structure won’t work for every single business, and you need to ensure you’ve laid strong internal foundations to support it. There are three key things to consider:
- A simple product
Think carefully about whether your product is the right fit for this model, and if it’s solving a problem you have. If customers frequently churn because they’re not satisfied with performance or functionality, changing your contract structure won’t help: you have product issues, not sales issues.
Likewise, if you have a very complicated service delivery model, this probably isn’t the right contract structure for you. It works best for simple products that are quick to implement and add value so that when it gets to the end of that opt-out period, customers have seen enough to want to stick around. If your product needs more time to get warmed up — it requires mass-market adoption to perform optimally, or large amounts of data to train an AI, for instance — you shouldn’t gamble on being able to prove value within the opt-out period.
2. A slick onboarding process
It’s not just your product that needs to be up-to-speed, but your onboarding processes, too. Again, this contracting model relies upon you being able to prove value within the opt-out period: If you offer a 30-day opt-out period and your customers aren’t fully onboarded until 45 days, you have a problem.
There’s a cross-functional effort required to align priorities between product, sales, customer success, and finance. It’s no good getting customers to sign, only to find that what should be 30 minutes of implementation simply isn’t at the top of the to-do list for IT, and takes weeks. Assume that customers will need more hand-holding than usual in order to see maximum value in their first 30 days, and make sure you have the capacity to deliver it. Ideally, you’ll be able to onboard customers seamlessly within a week. If it’s longer, your opt-out period should be extended to match.
3. A clear sales process
Good communication is critical when you’re selling this kind of contract. Make sure your sales team is solid on the messaging. This is not a trial period — it’s a full sign-on with the possibility to opt-out. If customers think it’s a ‘try before you buy’, they won’t buy until they’ve tried.
Similarly, SLAs need to be crystal clear. Thoroughly communicate the value proposition from the outset, so customers understand exactly what they’re supposed to be seeing by day 30. It will avoid arguments on day 29 if the product hasn’t lived up to their expectations. Ultimately, this contract structure should make the sales process easier and more streamlined. Giving customers an opt-out means their perceived level of commitment is lower and can reduce the anxious back-and-forth that often happens when you ask for their signature.
Obviously, there are caveats to contracting for speed — but there’s a massive opportunity, too. Done well, it can improve financial planning and reporting, speed up your time to revenue and help you scale your sales efforts.
‘Doing it well’ means really making sure you’ve nailed your ability to prove value quickly. You want to give customers the chance to opt-out, not a reason to. While it’s a commercial initiative, the foundations you’ll need to lay extend across the whole company: it won’t work unless you’re aligned on priorities across sales, finance, product and customer success.
At Dawn, we love to help our companies tackle all the challenges that come with scaling a business. If you’re building something in B2B SaaS or Fintech, let us know! We’re always looking to find and support the next great product.