Are you a budding entrepreneur (or employee of one)? Is your business based mainly on subscriptions/repeat purchases?
Have you ever felt that traditional business metrics, while useful, didn’t really help as well as you planned due to a lack of clarity on specific metrics for doing business in 2022?
Then you already know that you should read on, because this piece can introduce you to metrics that are emerging as critical in the web-based business environment.
There is a GAAP that needs a bridge
With all due respect to GAAP, the all-encompassing and respected traditional accounting principles, due to their non-specific nature, have failed to reveal the business metrics that help internet-based businesses get a snapshot of (or) success. failure).
Given the emergence of new revenue streams, channels and transaction frequencies, there is a gap (pun intended) to be bridged.
This includes MRR, CAC, activation rate, bounce rate, etc. is where new age business metrics emerge as beautiful metrics that help all stakeholders better understand how a traditional business is performing.
Of course, many of them are quite granular in nature and are rarely used individually. However, these small lego brick dimensions can add up to create a reliable snapshot of intermittent business performance that is more relevant to new age businesses.
So, let’s take a look at the new age indicators used by successful internet-based businesses today:
1. Monthly Recurring Income:
A metric primarily used by subscription and SaaS-based businesses.
To calculate MRR for a given month, take the total revenue from recurring subscriptions, divide it by the number of active users, and then multiply the result (the average amount) by the total number of customers.
MRR = Average Revenue Per User x Total Number of Customers
The whole point of calculating MRR is to get an estimate of the revenue your company expects to generate monthly (based on repeat subscription earnings).
There are different types of MRR:
• New MRR (new customers)
• Expansion MRR (upgrades)
• Reactivation MRR (previous customers returning)
• Shrinking MRR (reductions)
• Panic MRR (cancellations)
Monitoring these allows for deeper analysis of how the business is performing beyond broad levels of view.
(We’ll revisit these options in a later post.)
2. Annual Recurring Income
MRR is normalized monthly and ARR is normalized annually. That’s the only real difference.
Another way to calculate ARR:
ARR = Gross Annual Revenue – Recurring Revenue
However, ARR is used for longer-term analysis and thus to make adjustments and overhauls in business operations. ARR is one of the main tools for determining the success (or failure) of a business model and predicting growth (future potential) for a business.
It is then clear that ARR is one of the key elements used to derive valuation and raise capital.
Like MRR, there are several variations of ARR that business managers monitor:
• New subscriber ARR
• Update ARR
• Improve ARR
• Lower ARR
• Output ARR
As with MRR, the bare ARR number hardly describes the true level of performance of the business.
For example, a company may have a large net positive ARR, but it all comes from new subscribers due to a ridiculously high CAC (customer acquisition cost), while churn MRR has a steeper graph than renewal ARR.
It looks great from a single consolidated ARR figure, but it clearly points to a failed business model.
(We’ll revisit these options in a later post.)
3. Average Revenue per Account / User
ARPA or ARPU (user), as the name suggests, is a figure obtained by dividing total revenue by the number of subscribers.
This is a widely used figure for comparative analysis of growth (or decline in growth) in revenue per customer unit. Thus, making it an excellent tool for forecasting and planning.
Let’s say your firm made $200,000 in 2021 when you had 1,000 subscribers (ARPA = $200), and in 2022, with 1,200 subscribers, the total revenue was $300,000 (ARPA = $250). This simply means that your revenue per customer unit has increased, and broadly speaking, that’s great news that you can use to get a higher valuation/better financing, as well as make other business calls related to expansion. It is also used to compare the performance of a firm with others in the same industry.
If you and your competitor are both selling copyrighted music and your competitor is making $4.35 per subscriber/$5 per subscriber (almost the same total subscribers), you know you’re doing something right.
And you can access other metrics like ARR and MRR to find out what you’re doing right.
4. Total value of the contract
TCV is a very simple metric to calculate.
Just take your MRR, multiply it by the number of months you have a signed contract, and then add all the one-time payments.
All this is a full part of the income you will get from a particular customer.
Calculating TCV for a subscription-based business is useful because, as we all know, not all customers are created equal.
There are two customers who can buy contracts of similar length, but one of them can buy more than one-time add-ons and is therefore more valuable to your business.
An example here would be customers purchasing domains and hosting services. Many digital marketing companies can buy the same plans as home-run boutiques, but the latter can also buy the website building services you offer.
As a service provider, it would make a lot of sense for you to put more effort into marketing and selling to business owners who need help with technical setup and website design to increase unit revenue/profitability.
5. Lifetime value
LTV is the estimated average revenue a customer will earn over the entire period they are associated with you.
One of the simplest ways to calculate LTV is:
LTV = MRR / Output
Let’s say your MRR is $20 and your churn rate is 10%, then your LTV for a new customer will be (20/0.10), which is $200, and your expected customer lifetime is 10 months.
LTV is widely used by both SaaS and non-SaaS businesses to align it with CAC (customer acquisition cost) for revenue forecasting, customer segmentation estimation, (ultimate) profitability and product metrics (although the measurement ways may be slightly different). is metric. /service traction (general and with different cohorts)
Clearly, LTV is useful not only as a high-level metric, but also as an indicator that helps create better subscription packages as well as optimize marketing strategies/budgets.
6. Customer acquisition costs
Holy Grail metrics. How much did it cost you to get one unique customer? Calculation?
CAC = Total Marketing Cost (attributable to acquisition) / Total Customers Acquired
As a rule of thumb, CAC should always be lower than LTV. Obviously, it doesn’t make sense to spend more to get someone into your store than to spend once they’re there, right?
There are exceptions (sometimes you’d be forgiven for thinking they’re the rule), where a new business needs to reach enough people and launch them to reach a certain scale/stickiness to allow profitability.
However, a lot of ink has been spilled on this account and I wouldn’t be adding anything useful by touching on it.
7. Concentration risk
Customer concentration is also the percentage of your revenue that comes from your largest customer.
Concentration risk = Revenue from highest paying customer / Total revenue.
The main purpose of this metric is to understand the risk you face if your biggest customer leaves your fold.
In a setup where customer volume is high and stickiness is low, it makes sense that concentration risk is low. However, in some businesses that are niche in nature and have high stickiness due to low market size or consolidation or other such factors, a high percentage of concentration risk may be acceptable.
It goes without saying that CAC numbers should always be lower than customer concentration, and price buffers should always be planned to account for concentration risk.
8. Daily Active Users
DAU is the number of users who are active on your app or website every day.
User = anyone who visits the website/downloads the application
Active user = any visitor/app user who performs an action defined by the company to be considered “active”.
So, if you’re a news site and you decide that anyone who clicks on a news article and scrolls to the end is considered an active user, all users who take that action on a given day will be eligible to be counted. as DAU for that day.
This metric is one of the simplest ways to determine whether your product or service is well received by your intended customers.
Another good example would be meta / Facebook which defines DAU as follows:
“A registered and logged-in Facebook user (who is also a registered Facebook user) who is logged in to Facebook through our website or mobile device, or who uses our Messenger app.”
9. Monthly Active Users:
MAU is exactly the same as DAU, except that the calculation is per month instead of per day.
MAUs (much like DAUs) depend on the definition of “active user” and are not industry specific. So when used to measure the success of a product, they can be kind of misleading.
DAUs, when well defined, are a better measure of customer interaction quality than MAUs, but even so, well-defined MAUs certainly help create a holistic picture of a business’s footprint breadth.
10. Monthly Deficiency Rate
The percentage of customers you lose in a month.
Monthly Churn Rate = (Number of customers lost in a month / Total number of customers at the beginning of that month) * 100
Obviously, the higher your bankruptcy rate, the worse you perform (unless you’re the government and your site doesn’t list unemployment claims).
Obviously, it’s a critical metric that helps you focus on customer stickiness and take corrective action.
It’s relatively easy to spend money and get individuals to take the basic action of classifying them as customers, thus inflating their “user” numbers (remember MAU?). However, hooking them to your offer and using it regularly is a completely different scenario.
Heavy loss rates are always a clear giveaway when barriers to entry are low and retention tactics are weak. Require gap calculation (monthly or otherwise) for robust analysis of enterprise performance.
author: Agam Chaudhary has been helping e-commerce businesses increase revenue and profits since 2007. He specializes in ROAS and CRO engagements. Most recently, he managed a marketing algorithm for new age businesses that enabled brands to enhance customer experience and build contributing communities.
He can be reached at email@example.com WWW.TWO99ECOMMERCE.COM