Recurring Revenue

Annual Recurring Revenue (ARR)

Definition: ARR is the amount of subscription revenue a company earns annually, and MRR is the amount of subscription revenue a company earns monthly.

Monthly Recurring Revenue (MRR) 

Definition: ARR is the amount of subscription revenue a company earns annually, and MRR is the amount of subscription revenue a company earns monthly.

Retention

Customer (Logo) Retention

Definition: Customer (Logo) Retention is the percentage of customers (logos) you continue to do business with over a given period of time. This represents how well you are servicing your current customers.

Formula: ( # of Customers at the end of the period - new customers added during the period ) / # of customers at the beginning of the period

Gross Revenue Retention

Definition: Gross Revenue Retention is the percentage of recurring revenue, less downgrades and cancels, you maintain from existing customers over a given period of time. Expansion revenue is not included. This represents how well you are servicing your current customers.

Formula: ( $ Amount of recurring revenue at the beginning of the period - downgraded recurring revenue during the period - cancelled recurring revenue during the period ) / $ Amount of recurring revenue at the beginning of the period

Net Revenue Retention

Definition: Net Revenue Retention is the percentage of recurring revenue you maintain from existing customers over a given period of time less downgrades and cancels plus expansion from upgrades, cross-sells, and up-sells.

Formula: ( $ Amount of recurring revenue at the beginning of the period + expansion recurring revenue during the period - downgraded recurring revenue during the period - cancelled recurring revenue during the period ) / $ Amount of recurring revenue at the beginning of the period

Churn

Customer (Logo) Churn

Definition: Customer (Logo) Churn is the percentage of customers (logos) you lose business with over a given period of time. This represents how well you are servicing your current customers.

Formula: # of Customers lost during the period / # of customers at the beginning of the period

Gross revenue Churn

Definition: Gross Revenue Churn is the percentage of recurring revenue you lose from existing customers over a given period of time. Expansion revenue is not included. This represents how well you are servicing your current customers.

Formula: ( $ Amount of recurring revenue lost during the period ) / $ Amount of recurring revenue at the beginning of the period

Net Revenue Churn

Definition: Net Revenue Churn is the percentage of recurring revenue you lose from existing customers over a given period of time including downgrades and cancels minus expansion from upgrades, cross-sells, and up-sells.

Formula: ( $ Amount of recurring revenue lost during the period - expansion recurring revenue during the period ) / $ Amount of recurring revenue at the beginning of the period

Customer Acquisition Cost (CAC)

Definition: Customer Acquisition Cost is the amount of money it costs the business to acquire a new customer.

Formula: Total Dollars Spent on Marketing & Sales / New Customers

  • These numbers should be over the same period of time (month, quarter, year).

Customer Lifetime Value (CLTV | LTV)

Definition: The customer lifetime value is the amount of money a company expects to earn from a customer over the span of the relationship between the customer and company.

Formula: (Average Revenue per Customer x Gross Margin) / Customer Churn Rate

  • Average Revenue per Customer & Customer Churn Rate should be over the same period of time (month, quarter, year).

LTV:CAC Ratio

Definition: The LTV:CAC ratio is used to determine the amount of money a company expects to profit from an additional customer over the span of the relationship between the customer and company . This metric helps you figure out how much you should spend to acquire new customers.

Formula: [(Average Revenue per Customer x Gross Margin) / Customer Churn Rate] / [Total Dollars Spent on Marketing & Sales / New Customers]

  • These numbers should be over the same period of time (month, quarter, year).

How to Use: Determines how much a business can spend on acquiring new customers while still making money.

  • LTV:CAC < 1

    • The company is losing money on each new customer it acquires. If LTV is $1 and CAC is $2, you lose $1 every time a new customer is acquired.

    • May need to increase price, acquire customers more efficiently, or scale down marketing & sales. Halt or slow down sales & marketing until you can either improve LTV, or decrease CAC.

  • LTV: CAC = 1

    • The company is breaking even on each new customer it acquires. During high growth periods, this is the limit you can get up to, however, this ratio is not sustainable in the long term due to no profit being made.

  • LTV:CAC > 1

    • The company is making money on each new customer it acquires. This is where you want to be as a company. The ideal ratio is 3:1 for startups.

    • If LTV:CAC is much greater than 3, you may not be investing enough in sales & marketing and could be leaving business on the table. Ramp up sales & marketing and raise money if you need to.

CAC Payback Ratio

Definition: The CAC Payback Ratio is how quickly a company earns back the money spent acquiring a new customer.

Formula: [Total Dollars Spent on Marketing & Sales / New Customers] / [Average Revenue per Customer over period x Gross Margin]

  • These numbers should be over the same period of time (month, quarter, year). For example, [Total Dollars Spent on Marketing & Sales last month / New Customers added last month] / (Average MRR per customer last month x Gross Margin)

How to Use: Determines how quickly you can reinvest the money you get from a new customer.

  • CAC Payback Ratio > 1 year

    • Payback of 1 year or more. This is not an ideal place to be.

    • May need to slow down or stop spending on marketing & sales and refine the sales model.

  • CAC Payback Ratio < 1 year

    • Payback of less than 1 year. This is a great place to be.

    • Invest more money immediately and pump on the gas during good times, and tie growth to cash flows in bad times.

  • CAC Payback Ratio < 7 months

    • Payback of 5-7 months. This is where the top performing SaaS companies are.

    • Invest more money immediately and pump on the gas during good times, and tie growth to cash flows in bad times.

Net Promoter Score (NPS)

Definition: Net Promoter Score (NPS) is a management tool to measure customer satisfaction and has been shown to correlate with revenue growth relative to competitors. NPS is the percentage of customers rating their likelihood to recommend a company, a product, or a service to a friend or colleague as 9 or 10 ("promoters") minus the percentage rating this below 6 ("detractors") on a scale from 0 to 10.

Formula: NPS is calculated on the customer responses to the question: How likely is it that you would recommend our company/product/service to a friend or colleague? The scoring is typically done on a 0 to 10 scale. The customers answering 9 - 10 are Promoters, the customers answering 0 - 6 are Detractors, and the customers answering 7 - 8 are Passives. Passives count toward the total number of respondents, thus decreasing the percentage of detractors and promoters and pushing the net score toward 0.

  • NPS = [(# of Promoter Customers) / (# of Total Customers)] - [(# of Detractor Customers) / (# of Total Customers)]