Top Recurring Revenue Metrics

Slide 1 Top Recurring Revenue Metrics – Experts Weigh In 2 TOP RECURRING REVENUE METRICS More and more companies are turning to recurring revenue models to grow the business and increase customer satisfaction and retention. 47% of U.S. businesses have already adopted or are considering adopting a recurring revenue model. Have you? Whether you’re thinking about recurring revenue management or already testing the waters, consider the following metrics. All Contents © Aria Systems 2015 ----- Meeting Notes (10/12/15 11:06) ----- Make broader: Remove Subtitle First: More and more Second: 47% End: Whether you're thinking about a RRM or are already testing the waters, consider the following metrics. 2 3 TOP RECURRING REVENUE METRICS #1 BRUCE CLEVELAND General Partner, InterWest Partners Customer Retention Cost DEFINITION: Customer Retention Cost (CRC) includes all expenses a company incurs in retaining and cultivating its existing customers. FORMULA: Customer Success Team Cost + Renewals and Account Management Team Cost + Customer Engagement and Adoption Systems and Programs + Professional Services and Training + Customer Marketing “The CRC ratio must become a key topic in every board session. The survival of the company depends upon the executive team understanding and managing this metric.” = Customer Retention Cost All Contents © Aria Systems 2015 3 4 TOP RECURRING REVENUE METRICS #2 LTV-to-CAC RATIO DEFINITION: Lifetime Value (LTV) predicts the net profit a company will make from an entire customer relationship. Customer Acquisition Cost (CAC) includes all costs spent to acquire a customer. LTV-CAC is the ratio of the two. FORMULA: LTV-to-CAC Ratio = LTV / CAC (ARPA*GM*CL) Sum of all Sales & Marketing Expenses No. of new Customers Added ARPA = Average Revenue per Account GM = Gross Margin CL = Customer Life Customer Life = 1 / Gross Dollar Churn “LTV-to-CAC ratio is better than CAC or CAC Ratio because what you pay for something should be a function of what it’s worth. The general rule of thumb is that LTV-to-CAC should be 3.0 or higher.” SALIL DESHPANDE Managing Director, Bain Capital Ventures ( ) All Contents © Aria Systems 2015 ----- Meeting Notes (10/12/15 11:06) ----- Move customer life to the same line 4 5 TOP RECURRING REVENUE METRICS #3 Annual Recurring Revenue DEFINITION: Annual Recurring Revenue (ARR) is the expected total yearly value of your customers’ annual subscriptions. FORMULA: ARR = Σn n = customer’s annual subscriptions “ARR is the true north because all roads ultimately lead to it, including: new bookings, renewals, adoption (upsells/cross-sells), customer satisfaction, and retention.” TOM DIBBLE CEO, Aria Systems All Contents © Aria Systems 2015 5 6 TOP RECURRING REVENUE METRICS #4 Average Revenue Per Unit DEFINITION: Average Revenue per Unit (ARPU) is a revenue calculation often used by communications and networking companies and other subscription-based services where users pay varying fees depending on the type of contract and usage. FORMULA: Total Revenue ARPU = # of Subscribers “ARPU has always been a key benchmark in communications and other services industries because it provides insight into which product lines are profitable and driving growth.” TED BROOKBANK Senior Vice President, Advanced Technology Group All Contents © Aria Systems 2015 6 7 TOP RECURRING REVENUE METRICS #5 Customer Lifetime Value DEFINITION: Customer Lifetime Value (CLV) is the measure of profitable brand loyalty from all customers showing the total revenue derived from a customer over the course of the relationship. FORMULA: CLV = ((MT x AOA) AGM) ACR MT = # of monthly transactions AOA = average order amount AGM = average gross margin ACR = average customer retention (in months) “Average CLV allows a business to know how much to spend on customer acquisition and be profitable.” BOB FEGHALI Billing Industry Advisor All Contents © Aria Systems 2015 7 8 TOP RECURRING REVENUE METRICS #6 Customer Net Profitability Value DEFINITION: Customer Net Profitability Value (CNPV) is the amount of profit generated per customer across the entire engagement lifetime. FORMULA: CNPV = Revenue – Customer Acquisition Costs “CNPV provides a better metric for properly targeting a company’s sales and marketing efforts to attract profitable customers.” JEFFREY KAPLAN Consultant, THINKstrategies All Contents © Aria Systems 2015 8 9 TOP RECURRING REVENUE METRICS #7 Conversion Rates DEFINITION: Conversion rates include: the percentage of unique website visitors who sign up for a plan (free or paid) and the percentage of free trial subscribers who upgrade to a paid plan. FORMULA: # of free trial plan subscriptions # of unique visitors # of unique visitors # of upgrades from free trial to paid plans # of free trial plan subscriptions # of paid plan subscriptions OR OR “Conversion rates impact recurring revenue by giving us insights into consumer behavior, the usability of our website, and the popularity of our various product offerings.” KARISHMA KARNIK Sr. Program Manager, HERE, a Nokia company All Contents © Aria Systems 2015 9 10 TOP RECURRING REVENUE METRICS #8 Usage/Consumption Level Decile DEFINITION: Usage/consumption decile identifies which customers use the services provided and informs a company on how to create a distribute targeted offerings. FORMULA: Calculate a Decile Dk = Li + Li = Lower limit of the decile class N = Sum of the absolute frequency = Absolute frequency lies below the decile class = Absolute frequency “Usage/consumption level deciles provided actionable insight into whether the customers I am losing, gaining, or keeping use and value the service I provide.” BRENDAN O’BRIEN Co-Founder, Aria Systems ai k N 10 fi - Fi-1 * * k = 1,2,…,9 Fi-1 ai All Contents © Aria Systems 2015 10 11 TOP RECURRING REVENUE METRICS #9 Retention and Churn Rates DEFINITION: Retention Rate: the percentage of customers retained from period to period. Churn Rate: the percentage of customers lost from period to period. FORMULA: Retention Rate (%) = Total Customers (start of period) – Customers Lost (period) Total Customers (start of period) Churn Rate (%) = Customers Lost (period) Total Customers (start of period) “Customer Retention/Churn Rates are prime indicators of your business’s health. Minimizing churn is not just a revenue protection strategy, it’s a revenue growth strategy.” BOB HARDEN Principal, The Harden Group All Contents © Aria Systems 2015 11 12 TOP RECURRING REVENUE METRICS #10 Total Contract Value DEFINITION: Total Contract Value (TCV) is the summation of the values of all contract terms, inclusive of all revenue types and length of term. FORMULA: TCV = (MRR x # of months) + any one time revenue + any contracted services revenues OR TCV = (ARR x # of months) + any one time revenue + any contracted services revenues MRR = Monthly Recurring Revenue ARR = Annual Recurring Revenue “TCV is a key financial indicator of a business and a prerequisite for undertaking proper analysis and valuation of a company.” ANDREW DAILEY Managing Director, MGI Research All Contents © Aria Systems 2015 12 13 MAXIMIZING RECURRING REVENUE SUCCESS Measurements for Success All metrics are not created equal. While these metrics are valuable, the key is leveraging the ones that are most important to your role and your ability to drive long-term recurring revenue success in your business. For further information on how you can grow your recurring revenue business, visit www.ariasystems.com. All Contents © Aria Systems 2015 13