Read
Watch
Listen
Join

Subscription News delivered straight to your inbox.

Subscribe

The “Aha” Moment of Every Subscription Business: The President of Fashion ERP AIMS360 on Why MRR Is His North Star

Fritz Cambier-Unruh
Staff Writer, Subscribed

When businesses make the transition to a subscription model, one of the biggest challenges is that subscription performance is measured by a completely different set of metrics than traditional businesses.

For many, it can feel like learning a new language. But understanding terms like net retention rate, churn, and monthly recurring revenue—just to name a few—are essential if you want transparency into your company’s performance so you can make the right decisions going forward. Unfortunately, many newcomers to subscriptions get lost in the perceived complexity of subscription metrics. And, to be fair, subscription models are complex, due to frequent changes and highly variable characteristics, like flexible terms, upsells, downsells, and discounts. Subscription revenues aren’t based on one-time, make-the-sale- then-walk-away transactions.

Subscriptions are based on ongoing relationships that can change from month to month, so ensuring an ongoing optimum subscriber experience is essential to keep the revenue flowing. With these challenges in mind, we sought out the expertise of Shahin Kohan, President of AIMS360, the leading provider of ERP software for fashion brands.

AIMS360 transitioned to a subscription model in 2017 because they wanted to build better customer relationships and grow recurring revenue streams. AIMS360’s customers purchase monthly subscriptions for services like customer management, order management, processing, production, inventory, and more. With over 500 customers of every size and level of business sophistication, and over one billion in orders processed last year, AIMS360 needs to deliver a wide variety of different subscription products while keeping track of how the business is performing. So which metric is the best, in Kohan’s experience? The answer might surprise you.

The Most Important Metric Is Surprisingly Simple

“The problem is that many people who are new to subscriptions think analyzing the business has to be complex. But actually, it doesn’t,” says Kohan. “A very good businessman told me many years ago, ‘You have to find one number that manages your business.’ For example, in the hotel business, you’ll find that all the best operators focus on one metric: the occupancy rate. That’s because they know that occupancy rate tells you the whole story of the business—it’s like the vital sign, the gas gauge. If you understand that number, you can make a pretty accurate decision about everything else.” So what about the subscription model? Is it possible there is one metric that tells the story? Well actually, for AIMS360, there is. It’s called monthly recurring revenue (MRR).

A very good businessman told me many years ago, ‘You have to find one number that manages your business.’ If you understand that number, you can make a pretty accurate decision about everything else.

Shahin Kohan, President of AIMS360

Why MRR Is Critical for Accurate Reporting

The beauty of MRR is that it normalizes for all the different subscription terms and changes that happen over the breadth of the business. So you don’t get bogged down in all the minutiae of discounts, renewal rates, upgrades, etc. In other words, MRR gives you accurate reporting and analysis across dissimilar subscriptions terms. You can clearly see the revenue your business is relying on in a given month and over time, and that allows you to make a solid estimate of where revenue is heading. Now, to be clear, even though MRR represents revenue, it’s not an actual expression of exact revenue numbers. What it does is give subscription businesses a clearer view of how internal and external factors are impacting the business, especially in terms of sales and cash flow dynamics.

How to Use MRR

As an analytical tool, the value of MRR is not in any particular sum, but in the ability to clearly identify the results of individual business activities. Thus, the strongest benefit of calculating MRR is in providing a tool for creating and managing growth. Besides being a good measure on its own, MRR also plugs into other calculations of the finance function as well as a good overall measurement of financial health. Some examples:

  • Measure new contract growth and churn
  • Calculate CLV (Customer Lifetime Value)
  • Report on MRR Cohorts (i.e., subscription terms that were contracted in the same period of time) to assess how best to optimize revenue

The “Aha!” Moment and Rallying Around the MRR North Star

Kohan admits that it took him a while to figure out how important MRR was. And, “once I figured it out for myself, I had to convince everyone else at my company — especially those who came from a more traditional business background who were accustomed to measuring business against an entirely different set of metrics. You have to make everyone else have the same ‘aha’ moment.” One major battle was with the AIMS360 sales team. Says Kohan, “Sales are focused on the conversion, the decision by the customer to adopt our software. And of course, that is extremely important. To get a customer on board, you often have to bring in extra services as part of the deal. AIMS360 provides an excellent services component as part of our implementation. But once that’s done, the monthly subscription becomes the relationship, and the relationship is the revenue, the lifeblood of the company. So I had to teach our staff that the most important metric isn’t conversions, its MRR. That’s the measure of how successful our company is at maintaining our customer relationships.”

The monthly subscription becomes the relationship, and the relationship is the revenue, the lifeblood of the company.

Shahin Kohan, President of AIMS360

MRR Drives the Subscriber Experience

Kohan provides this example of how AIMS360 uses MRR in daily operations: “We display a customer’s MRR in our help desk system. So when a rep is talking to a customer who is having an issue with our products, they are constantly reminded of how much revenue that customer is bringing into the company.” This is important, Kohan notes, “Because it can be tempting to treat customer service after the sale as a lower priority. And let’s be honest, people calling a help desk are not usually in a good mood! But that MRR number reminds our staff how much that customer means to us as a company. It drives home the point that every customer relationship is really, really important.”

For a recurring revenue model to succeed, you have to be able to measure the recurrence. And that’s what MRR does.

Shahin Kohan, President of AIMS360

Final Thoughts: MRR for the Win!

When it comes to MRR, Kohan doesn’t mess around! “I keep the MRR for AIMS360 on my watch! I check it every day when I wake up.” And for Kohan, it’s a game changer. “Once you get used to using this metric, it will change the way you approach decision-making for your business,” says Kohan, “Just remember, for a recurring revenue model to succeed, you have to be able to measure the recurrence. And that’s what MRR does.”

Fresh subscription stories delivered to your inbox, weekly.

Subscribe to Subscribed
By using the website, you agree to the use of cookies. Head to our cookie policy to learn more about cookies and manage cookies on this website.