top recurring revenue metrics

Top Recurring Revenue Metrics – Experts Weigh In

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TOP RECURRING REVENUE METRICS

More and more companies are turning to recurring revenue models to grow the business and increase customer satisfaction and retention.

47% of U.S. businesses have already adopted or are considering adopting a recurring revenue model. Have you?

Whether you’re thinking about recurring revenue management or already testing the waters, consider the following metrics.


TOP RECURRING REVENUE METRICS #1

BRUCE CLEVELANDGeneral Partner, InterWest Partners

Customer Retention Cost

DEFINITION: Customer Retention Cost (CRC) includes all expenses a company incurs in retaining and cultivating its existing customers.

FORMULA: Customer Success Team Cost + Renewals and Account Management Team Cost+ Customer Engagement and Adoption Systems and Programs+ Professional Services and Training+ Customer Marketing

“The CRC ratio must become a key topic in

every board session. The survival of the company depends

upon the executive team understanding

and managing this metric.”

= Customer Retention Cost



LTV-to-CAC RATIODEFINITION: Lifetime Value (LTV) predicts the net profit a company will make from an entire customer relationship. Customer Acquisition Cost (CAC) includes all costs spent to acquire a customer. LTV-CAC is the ratio of the two.

FORMULA: LTV-to-CAC Ratio = LTV / CAC (ARPA*GM*CL) Sum of all Sales & Marketing Expenses No. of new Customers AddedARPA = Average Revenue per AccountGM = Gross MarginCL = Customer LifeCustomer Life = 1 / Gross Dollar Churn

“LTV-to-CAC ratio is better than CAC

or CAC Ratio because what you pay for something

should be a function of what

it’s worth. The general rule of

thumb is that LTV-to-CAC should be

3.0 or higher.” SALIL DESHPANDEManaging Director,Bain Capital Ventures

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Annual Recurring Revenue

DEFINITION: Annual Recurring Revenue (ARR) is the expected total yearly value of your customers’ annual subscriptions.

FORMULA: ARR = Σn

n = customer’s annual subscriptions

“ARR is the true north because all roads ultimately

lead to it, including:

new bookings, renewals, adoption

(upsells/cross-sells), customer

satisfaction, and retention.”

TOM DIBBLECEO,Aria Systems



Average Revenue Per Unit

DEFINITION: Average Revenue per Unit (ARPU) is a revenue calculation often used by communications and networking companies and other subscription-based services where users pay varying fees depending on the type of contract and usage.

FORMULA:

Total RevenueARPU = # of Subscribers

“ARPU has always been a key

benchmark in communications

and other services industries because it provides insight

into which product lines are profitable

and driving growth.”

TED BROOKBANKSenior Vice President,Advanced Technology Group



Customer Lifetime ValueDEFINITION: Customer Lifetime Value (CLV) is the measure of profitable brand loyalty from all customers showing the total revenue derived from a customer over the course of the relationship.

FORMULA: CLV = ((MT x AOA) AGM) ACR

MT = # of monthly transactionsAOA = average order amountAGM = average gross marginACR = average customer retention (in months)

“Average CLV allows a business

to know how much to spend on

customer acquisition and

be profitable.”

BOB FEGHALIBilling Industry Advisor



Customer Net Profitability Value

DEFINITION: Customer Net Profitability Value (CNPV) is the amount of profit generated per customer across the entire engagement lifetime.

FORMULA: CNPV = Revenue – Customer Acquisition Costs

“CNPV provides a better metric for

properly targeting a company’s sales

and marketing efforts to attract

profitable customers.”

JEFFREY KAPLANConsultant,THINKstrategies



Conversion RatesDEFINITION: Conversion rates include: the percentage of unique website visitors who sign up for a plan (free or paid) and the percentage of free trial subscribers who upgrade to a paid plan.FORMULA: # of free trial plan subscriptions

# of unique visitors

# of unique visitors# of upgrades from free trial to paid plans

# of free trial plan subscriptions

# of paid plan subscriptions

OR

OR

“Conversion rates impact recurring

revenue by giving us insights into

consumer behavior, the usability of our

website, and the popularity of our various product

offerings.”

KARISHMA KARNIKSr. Program Manager,HERE, a Nokia company



Usage/Consumption Level DecileDEFINITION: Usage/consumption decile identifies which customers use the services provided and informs a company on how to create a distribute targeted offerings.

FORMULA: Calculate a Decile Dk = Li +

Li = Lower limit of the decile classN = Sum of the absolute frequency = Absolute frequency lies below the decile class = Absolute frequency

“Usage/consumption level deciles

provided actionable insight into whether the customers I am

losing, gaining, or keeping use and

value the service I provide.”

BRENDAN O’BRIENCo-Founder,Aria Systems

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Retention and Churn RatesDEFINITION: Retention Rate: the percentage of customers retained from period to period.

Churn Rate: the percentage of customers lost from period to period.FORMULA: Retention Rate (%) =

Total Customers (start of period) – Customers Lost (period)Total Customers (start of period)

Churn Rate (%) =Customers Lost (period)

Total Customers (start of period)

“Customer Retention/Churn Rates are prime

indicators of your business’s

health. Minimizing

churn is not just a revenue protection

strategy, it’s a revenue growth

strategy.”BOB HARDENPrincipal,The Harden Group



Total Contract ValueDEFINITION: Total Contract Value (TCV) is the summation of the values of all contract terms, inclusive of all revenue types and length of term.

FORMULA: TCV = (MRR x # of months) + any one time revenue + any contracted services revenues

ORTCV = (ARR x # of months) + any one time revenue + any contracted services revenues

MRR = Monthly Recurring RevenueARR = Annual Recurring Revenue

“TCV is a key financial indicator of

a business and a prerequisite for

undertaking proper analysis and

valuation of a company.”

ANDREW DAILEYManaging Director,MGI Research


MAXIMIZING RECURRING REVENUE SUCCESS

Measurements for SuccessAll metrics are not created equal. While these metrics are valuable, the key is leveraging the ones that are most important to your role and your ability to drive long-term recurring revenue success in your business.For further information on how you can grow your recurring revenue business, visit www.ariasystems.com.

top recurring revenue metrics

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