Hot Tip #4: Giving free months can get expensive

Who doesn’t like free stuff?? (spoiler alert: your ARR reporting doesn’t, that’s who!)

It’s halfway through July, and as we get into the later quarters of the year, quotas are being eyed with more scrutiny and spiffs and promotions offered more liberally, chief amongst them being free trials.

Free trials are a great incentive to push customers into at least trying your solution and ideally signing a contract, because hey, who doesn’t like free??

These conversations sound like “Sign up by this date and I can add a couple of months for free!!” Perfect for the budget-conscious buyer and quota-conscious seller but what about the accurate metric-conscious Finance team…?

𝐇𝐨𝐭 𝐭𝐢𝐩 #4: Be aware of the effects of free trials on your ARR reporting and apply the formula consistently.

🚨 No exceptions, no favors, no case-by-case basis.

Now there are multiple ways you can treat free trials that each come with their own set of outcomes. Let’s use a one year contract for 10k with a free trial period of 3 months, beginning July 1st 2024.

𝐎𝐩𝐭𝐢𝐨𝐧 1️⃣: record a 15-month contract with 0 ARR from 2024-07-01 to 2024-09-30 and the 10k ARR from 2024-10-01 to 2025-09-30.
⏩ Outcome: the following year’s renewal starts October 1, 2025, for 12 months, and any increase/decrease will be directly compared to the 10k ARR. A flat renewal at 10k shows no change in October 2025.

𝐎𝐩𝐭𝐢𝐨𝐧 2️⃣: record a 15-month contract with the 10k spread over the entire period (2024-07-01 to 2025-09-30).
⏩ Outcome: your ARR throughout that 15-month period is now 8k (=10k*12/15), and therefore the following year’s renewal starting October 1, 2025, for 12 months, may show a change in ARR even if it’s a flat renewal (2k, if it renews at 10k). So, although there will appear to be a year-over-year increase, it’s not attributable to an upsell or price increase but an admin decision.

Which version works best is up to your organization to decide but it’s important to note and consider how these outcomes will factor into such things like financial reporting, commissions paid out, and where/how these free trials are recorded.

As you can see with most of these tips, it’s more so about making a decision on how things are to be recorded, and applying a systematic approach so that the corresponding metrics are consistent and reliable.

Revenue-focused meetings can be stressful enough without trying to explain calculation methods that aren’t being applied consistently or not everyone is on board with.

That’s why our clients love ARRow, as it ensures the consistent application of agreed upon calculations. From Finance to Sales to Customer Success, all your stakeholders should be aware of the impacts and outcomes to avoid misaligned expectations. 

Our last summer tip is coming up next week so make sure to keep an eye out! Finance & Rev Ops teams how are we feeling so far?? Looking to incorporate these into your organization or have any quick tips of your own to share?