While backward-looking, conventional GAAP metrics like cost of goods sold and gross profit still serve a purpose, to prove the value of the subscription model and optimize customer relationships, manufacturers must consider and track a new set of forward-looking metrics.
1. Annual Recurring Revenue (ARR). ARR is the amount of revenue a company expects to repeat in a year, which provides a holistic view of a company’s health. With ARR as the foundational metric, companies can forecast revenue, set realistic goals, and make informed decisions to maximize growth.
2. Churn Rate (Attrition Rate). Churn rate is the rate at which a business loses subscribers, and something that becomes critical as you grow your subscriber base. It is 5x more expensive to acquire a new customer than to maintain an existing one. As one digital innovation exec at an IoT company notes: “customer retention, at a very eye-level, is paramount. If you spend money to acquire customers but you lose them as fast as you acquire them because you don’t provide the right experience, then its an economic business model that will not scale at all.”
3. Customer Lifetime Value. (CLV) CLV may be a novel concept for manufacturers. It’s the expected amount of money a customer will spend throughout the customer lifecycle, taking into account the cost to acquire new customers and maintain existing ones. It should be the ultimate indicator of which customer acquisition channels are most profitable and can serve as a guide for pricing and packaging strategies.
4. Average Revenue Per User (ARPU). ARPU is calculated by dividing revenue from all services provided by number of consumers. Having a per-user view of revenue is useful to measure how successful pricing and packaging strategies are, whether the sales and marketing team’s value propositions are consistently improving, and if the value of a product is being aligned with the right customer. It can be a valuable indicator of what CLV goals should be.
5. Growth Efficiency Index (GEI). GEI boils down to how much it costs a company to acquire new customers — how much it costs to acquire $1 of ARR. Using it, manufacturers can spend at least enough to replace customers churned. What’s left can be booked as profits or re-invested in growth. With this insight, companies have more flexibility to be bullish or conservative. GEI will fluctuate with the initial transition to a subscription model, and also as a company matures and begins to offer new products and expand into new markets.