Top Recurring
Revenue Metrics
EXPERTS
weigh in
10 industry experts share their “go-to”
metrics for billing and recurring revenue success.
Here's a list to tip the scales in your favor. *
CUSTOMER RETENTION COST
DEFINiTION
Customer Retention Cost (CRC) includes
all expenses a company incurs in retaining
and cultivating its existing customers.
FORMULA
Customer Retention Cost =
Customer Success Team Cost
+ Renewals and Account Management Team Cost
+ Customer Engagement and Adoption
Systems and Programs
+ Professional Services and Training
+ Customer Marketing
Bruce Cleveland
General Partner,
InterWest Partners
“The CRC ratio must become a key topic in every board
session. The survival of a company depends upon the
executive team understanding and managing this metric.”
LTV-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-to-CAC is the ratio of the two.
FORMULA
LTV : CAC Ratio = LTV / CAC
Salil Deshpande
Sum of all Sales & Marketing Expenses
CAC =
Managing Director,
Bain Capital Ventures
No. of new Customers Added
LTV = ARPA * GM * CL
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.”
ANnual recurring revenue
DEFINiTION
Annual Recurring Revenue (ARR) is the
expected total yearly value of your
customersʼ annual subscriptions.
FORMULA
n
ARR =
Tom Dibble
n = customerʼs annual
CEO,
Aria Systems
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.
Average Revenue per Unit
DEFINiTION
Average Revenue per Unit (ARPU) is a
r evenue c a l cu l a t i o n o f t e n u s e d b y
co m munications and networking companies
and other subscription-based services
where users pay varying fees depending
on the type of contract and usage.
FORMULA
ARPU =
Ted Brookbank
Total Revenue
Senior Vice President,
Advanced Technology Group
# 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.”
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
Bob Feghali
AOA= average order amount
Billing Industry Advisor
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.”
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 =
Jeffrey Kaplan
Revenue - Customer Acquisition Costs
Consultant,
THINKstrategies
provides a better metric for properly targeting
a company’s sales and marketing efforts to attract
profitable customers.”
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
OR
# of unique visitors
Karishma Karnik
# of paid plan subscriptions
Senior Program Manager,
HERE, a Nokia company
OR
# of unique visitors
# of upgrades from free trial to paid plans
# of free trial plan subscriptions
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.
Usage/Consumption Level Decile
DEFINiTION
Usage/consumption data identifies which
customers use the services provided and
informs a company on how to create and
distribute targeted offerings.
FORMULA
Calculate a Quantile
Ip = N
k
q
Brendan O’Brien
Ip = Integer
N = finite population of values indexed from 1 to N
Co-Founder,
Aria Systems
k q-quantile
th
“Usage/consumption level deciles provide actionable
insight into whether the customers I am losing, gaining,
or keeping use and value the service I provide.”
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)
Bob Harden
Total Customers (start of period)
Principal,
The Harden Group
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.”
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
Andrew Dailey
Managing Director,
MGI Research
“TCV is a key financial indicator of a business and a
prerequisite for undertaking proper analysis and
valuation of a company”
$
Maximizing Recurring
Revenue 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.
Copyright © 2015, Aria Systems, Inc. All rights reserved.
Aria Systems and the Aria logo are trademarks or
registered trademarks of Aria Systems, Inc.
*These metrics are in no particular order.
www.ariasystems.com
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