top recurring revenue metrics
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Top Recurring Revenue Metrics – Experts Weigh In
All Contents © Aria Systems 2015 2
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.
All Contents © Aria Systems 2015 3
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
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TOP RECURRING REVENUE METRICS #2
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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TOP RECURRING REVENUE METRICS #3
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
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TOP RECURRING REVENUE METRICS #4
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
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TOP RECURRING REVENUE METRICS #5
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
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TOP RECURRING REVENUE METRICS #6
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
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TOP RECURRING REVENUE METRICS #7
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
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TOP RECURRING REVENUE METRICS #8
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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TOP RECURRING REVENUE METRICS #9
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
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TOP RECURRING REVENUE METRICS #10
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
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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.
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