Dear SaaStr: We’re at $10m Run Rate, But A Lot is Consumption Based. Does That Count as “ARR”?
I mean look, in the “old days” of SaaS we often sort of said No. If it wasn’t truly recurring revenue, it didn’t count as ARR. And many still stick to that, at least partially. Shopify breaks out the difference, as does Toast.
But most startups don’t. Most B2B companies count everything as “ARR”, right or wrong.
My summary view: It’s legitimate to count consumption revenue as ARR *if* it’s generally recurring and predictable. And called out as consumption revenue (vs subscription).
- The key is transparency. If the consumption revenue is tied to ongoing usage patterns that are consistent and can be reasonably forecasted—like AWS or Twilio-style models—then yes, it can be included in ARR.
- But you need to break it out clearly. Investors and acquirers will want to see the split between true subscription revenue and consumption-based revenue.
- And be honest and open about the margins of each revenue stream, if they are different. For example, the margins in financial services and payments are often much lower than SaaS revenue.
For example, if you’re at $10M ARR and $3M of that is consumption-based, you should show it as $7M subscription ARR and $3M consumption ARR. This way, you’re not misleading anyone, and it’s clear how much of your revenue is locked in versus variable. The more predictable the consumption revenue, the more it will be valued like ARR.
If the consumption revenue is highly volatile or tied to one-off spikes, it’s better to exclude it from ARR and present it separately. Otherwise, you risk overinflating your metrics and losing credibility. Just stack it out in your reporting, and people will respect the clarity.
How Shopify does it:
