• Churn Rate.
You need to understand and manage churn to the nth degree for both logo churn and revenue churn. With different volumes and price levels (e.g. $10/mo vs. $1000/mo customer), a 5% churn on customer base may only equate to a 1% churn on revenue or vice versa. Looking at it based on a cohort analysis is very valuable. Let’s say of 100 customers who signed up in any given month, how many are with you at 3 months, 6 months, 3 years? Over time, churn from a dollar standpoint may be negative, since the customers who stay with you eventually pay more than those lost. Looking at churn from many different angles and the ability to drill down is critical to understanding your business.
• Customer Acquisition Costs (CAC).
It is obvious, but many times overlooked. It costs more to get a customer than maintain a customer, and it’s critical to know exactly how much and how long the payback period is for each plan, service, seat, etc. If a customer leaves before reaching the payback period, you don’t cover your costs and you’ve lost profit potential. This metric, along with churn and lifetime value of a customer, will give you a good barometer of the sales and marketing cycle as well as the quality and value of customers.
• Lifetime Value of a Customer.
While CAC can tell you at which point you will break even on a customer, it does not tell you how profi table these customers will be over time. Analyzing the lifetime value of your customers will help you identify the customers or class of customers that are most important to your bottom line. This is critical to make the right decisions that can drive growth and increase that lifetime value. Which services are those customers using most? What features are most valuable to them? These are the keys to unlocking more profit in your subscription business.
• Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR).
MRR/ARR is the lifeblood of this growing subscription economy – satisfied customers are committed customers, and committed customers lead to financial stability and compounding growth over the long haul. MRR/ARR is your leading economic indicator: how are you performing, where are you growing, where are you losing and why? In order to forecast within the best possible accuracy every month, you need to look at MRR/ARR from four angles:
- Revenue for new customers
- Revenue increase from existing customers
- Revenue decrease from existing customers
- Revenue lost due to customer churn.
You can roll this forward every month, trend it, and, with the ability to drill down in to these categories, you can gain an insight to your company that you never thought existed. You can use these same four angles on a customer basis as well.The heart of the cloud subscription business model is dynamic, ongoing revenue relationships, and the best way to measure success is to have the metrics that match. As a data junkie, I’m always trying to understand the business from top to bottom, and confidence in numbers breeds predictability. For example, I can determine, within a very precise margin of error, our revenue for the month on the first day of the month and how much cash we are going to collect. As a team, we can better understand all facets of the business, from financing strategy to customer profitability to sales and marketing efficiencies. And, tough questions like how to scale the sales team, or where to make marketing investments are now based on trusted numbers.