How to create and measure a recurring revenue business

1. How to create and
measure a recurring
revenue business
Leo Faria
leo@saasmetrics.co
@lhfaria
www.saasmetrics.co

2. Welcome to the
subscription
economy
We’re living the subscription
economy.
Business relations has shifted from
one time sales to relationship
based.
The subscription economy is all
about customer relationships.
For companies, migrating from
CAPEX to OPEX makes a lot of
sense financially.
INTRO
1970s
Products
1990s
Products + Services
2000s
Customer Centric
Today
Relationship Centric
Evolving the approach to interact
and relate with customers

3. Buying almost
anything via
subscription
Subscription is becoming the
default business model for many
startups and new ventures around
the world.
Today you can almost any kind of
goods based on a subscription
model, from digital content to
computer infrastructure.
Not only startups, but traditional
companies are also shifting to a
subscription model.
INTRO Music Movies
Software
Computing
Food & Beverage
Books

4. A new way to buy
products and
services
Via subscriptions, customers pay
only for what they use.
As the commitment is lower,
customers are willing to try new
things with lower risk.
Operation and maintenance are no
longer something customers need
to worry about.
Product evolution is part of the
service.
PRODUCT ECONOMY VS. SUBSCRIPTION
Product Economy Subscription
CAPEX OPEX
High upfront investment, out
of the core business
Pay-as-you-go pricing
Expensive and demanding
setup and implementation
Low or inexistent adoption
barriers
Unnecessary operation
expenses and workload
Operation expenses and
workload as part of the service
Highly dependent and tied to
the solutions
More flexibility to try new
solutions and services
Product evolutions upon paid
updates
Product evolution as part of
the service
BUY NOW SUBSCRIBE
BUYER’S PERSPECTIVE

5. Not like traditional
business
management
Recurring revenue for the win.
Recurring revenue businesses
requires specific management
methods and techniques.
All the aspects of the business are
affected by the goal of building
long-term relationship with
customers.
Knowing exactly what and how to
to measure is crucial.
PRODUCT ECONOMY VS. SUBSCRIPTION BUILDER’S PERSPECTIVE
BUY NOW SUBSCRIBE
Product Economy Subscription
Sell units
Monetize customer
relaionship
Price per unit Pay-as-you-go pricing
One time orders Multiple orders over a lifetime
Simple financial metrics and
accounting method
Complex, interrelated
bookings, billings and revenue
Fast-moving levers Slow building business
Start the month from scratch Visibility and predictability

6. We’re only just at the
beginning of SaaS
We may have been talking about
SaaS for more than a decade, but
we’re still just at the beginning.
The legacy software companies
including Oracle, Microsoft, SAP and
and IBM control 83% of the market
cap of software businesses,
representing $830B in market cap.
The largest SaaS company,
Salesforce, is just about half the size
of SAP, and Microsoft is 8x bigger.
MARKET
In revenue terms, the legacy vendors control an
astounding 93% of revenue: $245B compared to $19B.
Source:
Tomasz Tunguz, Veture Capitalist at Redpoint Ventures
http://tomtunguz.com/saas-limitless-opportunity
SaaS
Legacy

7. SaaS is growing 5x faster
than on-premises software SaaS is growing 5x faster than
on-premises software.
85% of all new applications
are architected for SaaS.
Our market is event bigger if we
consider other kind of
subscription business:
• Monthly gift boxes;
• Online education;
• Media subscription;
• And more.
MARKET
0
20
40
60
80
100
120
140
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
$ 5.5 $ 8.0 $ 13.4 $ 21.2 $ 33.0 $ 47.2 $ 63.1 $ 78.4 $ 92.7 $ 105.4 $ 116.3 $ 125.5 $ 132.5
Source: Forrester Research, Inc. Forecast: Global Public Market Size
$78.4B
TotalpublicSaaSmarket(US$billions)
$132.5B
9.14% CAGR

8. The right metrics for
each stage of your
company
For a subscription business, there
are a few key metrics that need
your undivided attention. And the
priority of these metrics shift as
you grow.
This means that instead of
measuring dozens or hundreds of
different metrics, you should start
with the core only and evolve
from there – as your business
grows and demands more control
and higher complexity.
METRICS

9. Monthly Recurring
Revenue
Monthly Recurring Revenue, almost
always referred as MRR, is probably
the most important metric at all of
any subscription business.
Once you acquire a new customer
you got an recurring revenue, which
means you don’t have to worry
about one-off sales every month.
The general concept is that MRR is a
measure of the predicable and
recurring revenue components of
your subscription business.
METRICS
MRR
New MRR + Reactivated MRR, Net New MRR
New MRR is the simply new revenue brought by brand new
customers acquired.
Expansion MRR + Up-sell, Cross-sell
New revenue from existing customers due to up-sells and
cross-sells.
Contraction MRR + Cancellations, Refunds, Downgrades
Lost of revenue from existing customers due to downgrades,
cancellations and refunds.

10. Bookings, Revenues
and Billings
It’s important you keep track of all
these metrics very carefully.
You want to know how much
revenue your company has booked,
how much is your monthly
revenues, and how much revenue
you have actually billed.
In fact, that’s even crucial to decide
how to pay commissions and
variable compensation to your
sales reps.
Also: Deferred revenue.
METRICS Bookings
Bookings represent the commitment of a customer to spend
money with your company.
Revenue
Revenue happens when the service is actually provided and you
recognize money in exchange.
Billings
Billings is when you actually collect your customers money, up-
front or ratably during customer lifetime.

11. Customer
Acquisition Costs
Customer Acquisition Cost, or
simply CAC, refers to the resources
that a business must allocate
(financial or otherwise) in order to
acquire an additional customer.
METRICS
CAC
Customer
Lifetime Value
Customer lifetime value measures
the profit your business makes
from any given customer.
LTV
Unit economics help you make important decisions
about every aspect of the business.
CEO
How are our unit economics working?
Manage business unit economics to build a healthy company
and make sure we're not selling dollar bills for ninety cents.
Customer
Success
Which customer segments are yielding the best results?
Identify which customer segments holds the highest LTV and
lowest CAC. Know if they're churning before the payback period.
CFO
What are our MRR movements?
Track customers subscriptions, upgrades, downgrades and
cancellations. Manage MRR and make business predictable.
Also: LTV:CAC Ratio, Months to Recover CAC.

12. Churn
If you’re just getting started to
acquire your very first customers,
churn may not be a big deal, but as
soon as you get over a hundred
customers churn becomes crucial.
And by crucial, I mean it can be the
different between the success and
failure of your business.
Specially if you’re a high speed growth
company, churn can be extremely
frustrating because it means you’ll
have to spend your marketing & sales
resources to replace lost customers.
Also: Negative churn.
METRICS Before trying to reduce SaaS churn, it’s important
you understand what causes SaaS churn.
• Customer is not the right fit;
• Customer moves to a competitor;
• Customer believes you don’t care about them;
• Customer gets bigger, acquired or go bankruptcy;
• Unintentional cancellations.

13. Read more
blog.saasmetrics.co
The essential SaaS metrics guide
saasmetrics.co/books/the-essential-saas-metrics-guide
Leo Faria
leo@saasmetrics.co
@lhfaria
www.saasmetrics.co