Subscription Metrics 101
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For those who don't have a Ph.D in Subscription Metrics, you need to start somewhere. That place is here! Take a high-level look at the basic metrics for managing a subscription business: The importance of ARR, MRR, ACV How to calculate churn Up-sell vs. cross-sell, and how to measure each Do I really care about customer lifetime value? Evergreen vs. Termed Subscriptions
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Subscription Metrics 101
- 2. 2 Almost Everything I Needed to Know about Recurring Revenue I learned from Pink Floyd
- 4. 4 Compounded Growth is Great More Predictability $0 $2,000 $4,000 $6,000 $8,000 $10,000 “Upside Subscription Business” • 20% Customer Growth • 10% Customer Up-sell “Subscription Business” • 20% Customer Growth “Transactional Business” • 20% Customer Growth
- 5. 5 But You Have to Control Churn
- 6. 6 MRR – Monthly Recurring Revenue Monthly Recurring Revenue at the end of each month. Computed by taking the MRR from the previous month and adding Net New MRR. Some businesses like to use CMRR for Contracted MRR
- 7. 7 Why is CMRR different than MRR? Evergreen vs Termed Billing frequency is different than commitment/contract term!
- 8. 8 ARR – Annual Recurring Revenue ARR = Annual Recurring Revenue Most often used in businesses where contracts are at least a year in length). ARR = MRR x 12
- 9. 9 ACV – Annual Contract Value Annual Contract Value of a subscription agreement. For multi-year agreements we typically will also look at TCV TCV = Total Contract Value
- 10. 10 DMRR – Delta MRR Delta MRR is the Change in Value in MRR USUALLY FROM A CROSS-SELL OR UPSELL (can be a negative value if it’s a downsell)
- 11. 11 Churn There are a lot of ways to look at churn! • Net Numbers – absolute numbers of churn • Percent - churn expressed as a percentage of customers in period • MRR Churn = Churned MRR Previous Months MRR
- 12. 12 MRR Expansion vs. DMRR % MRR Expansion - Increase in revenue from existing customers as a % of total revenue. Delta MRR Previous Months MRR % MRR Expansion =
- 13. 13 % Net MRR Churn This is a helpful metric, but please don’t get me started on “negative churn” % Net MRR Churn = Churned MRR - DMRR Previous Months MRR
- 14. 14 Metrics How to Use Is the business growing over time, or contracting? How much deferred revenue are you building in your revenue base that you can use to drive future growth? Committed Monthly Recurring Revenue Delta Monthly Recurring Revenue Annual Contract Value Reasons for Customers Leaving % Customers Staying Why is monthly recurring revenue increasing or decreasing? Bigger contracts? Less discounts? New promo? What is the total vale of annual customer contracts that are committed? Why is churn occurring? Natural organic churn, product deficiency, competition? How effective are you at renewing customers over time? CMRR DMRR ACV CHURN RENEWALS RATE So Here are the Basics
- 15. 15 Now That You Have The Basics….
- 16. 16 What’s All the Fuss about Wall St?
- 17. 17 Traditional Income Statements are Backward Looking Income Statement For Period Ending December 31, 2013 Traditional income statements measure revenue based on how much money you made this past period.
- 18. 18 And They are One-timed Focused Traditional income statements do not differentiate one-time from recurring revenue or expenses. Income Statement For Period Ending December 31, 2013
- 19. 19 CAC – Cost to Acquire a Customer CAC = SUM of all Sales & Marketing Expenses Number of New Customers Added Is CAC the new COGS?
- 20. 20 Entering ARR + New ACV - Churn = EXITING ARR The Simple View of “The Three Metrics” ARR Growth Efficiency Sales & Marketing Expense / New ACV Recurring Profit Margin (Entering ARR – COGS – G&A – R&D) / Entering ARR
- 21. 21 Expanding the 3 Metrics How much of your ARR you keep every year Entering ARR less annualized Non-growth spend How much does it costs to acquire $1 of ACV Retention Rate Recurring Profit Margin Growth Efficiency Annual Recurring Revenue
- 22. 22 Case Study Informatica launched SMB product driving new CMRR by 40% in 12 months. KNOW Zuora gives us the right commerce tools and metrics to be able to instrument our business for growth. Ron Papas, Senior Vice President & General Manager
- 23. 23 2
Editor's Notes
- Billing frequency is different that contract term!!!
- The difference between a cross sell and an upsell – Cross sell is a new product. Upsell is to sell more of the same product. Both are good.
- They way you measure churn depends on a few factors.
- the number that will go negative if the Expansion revenue from existing customers starts to outstrip the lost revenue from churn. “Getting to negative Net MRR Churn is a great goal for a SaaS company” – David Skok
- Smaller professional services and cash, and side by side
- Commercial for subscribed.