6 Recurring Revenue Metrics
Updated: Jul 30, 2019
Recurring Revenue Metrics (RRM) have become a mission-critical component of growth plans for many businesses, and a useful tool for business leaders for assessing overall success.
As a business, it is inevitable that some of your clients will either reduce their spending with you or leave altogether. For businesses that are not tracking performance on a regular basis, considerable time can lapse before the cumulative impact of declining sales becomes apparent.
We recommend you incorporate metrics on your management dashboard that enable your leadership team to quickly assess current performance against historical trending, to inform your strategy for revenue generation and direct your organisation's efforts more effectively..
There are many metrics that relate to revenue, this article dissects 6 key measures that relate to recurring revenue.
1. Customer Churn Rate
Churn rate is an important metric for companies that have customers who pay on a recurring basis. Think subscription-based companies. No matter how much your monthly revenue is, if your customer does not hang around long enough for you to, at the very least, recoup your average Customer Acquisition Cost (CAC), then you’ve got a problem.
The success of every recurring revenue-based business depends on providing value to customers over time on a continuous basis. Measuring your churn rate will provide an indication of your customers perception of value - If it's in decline then you need to take action to restore it.
When a customer leaves it obviously results in lost income but, in fact, it damages the bottom line quite severely too. This is because it costs around 7 times as much to gain new customers than it does to retain them.
If you find that your churn rate is high, or is steadily growing, it is an indication of one of the following:
Your product is flawed
You are being trumped by a competitor
Your share of the market is decreasing
How do you combat this?
The fastest method of increasing your Annual Recurring Revenue (ARR) and Customer Lifetime Value (CLV) is to reduce churn. To better understand why and how you can reduce churn:
Ask your customers for feedback regularly
Analyse churn as it happens
Lean into your best customers to maximise their value
Engage your best customers in product and service development
Define a roadmap for acquiring new customers
2. Customer Lifetime Value (CLV)
In order to achieve recurring revenue, you need to build strong relationships with your customers. Maintaining and maximising these relationships is important and the Customer Lifetime Value (CLV) is a metric used to track this.
By measuring this value in relation to the cost of customer acquisition (CAC), businesses can then measure how long it takes to make back the investment required to earn a new customer in the first place.
Customer lifetime value is a metric of margins, customer acquisition and retention costs, and the average duration of customer relationships.
This metric can be increased by ensuring your existing margins continuously grow. It can also be developed by leveraging cross-sell and up-sell opportunities and reducing churn.
3. Annual Recurring Revenue (ARR)
Annual recurring revenue (ARR) is a useful headline metric for gauging the stability of a business and a useful indicator of forward revenue. It represents revenue that is predictable and of low risk.
Increasing ARR has a positive impact on stock valuations. and shareholder confidence.
In industries where multi-year contracts are commonplace, such as the tech industry, Total Contract Value (TCV), which is the measure of all business under contract, provides additional tracking of long-term business growth and success.
4. Net New Business
Start-ups need to immediately acquire market share in order to build a sustainable revenue base and so tracking Net New Business revenue should be a priority.
Tracking monthly and annual revenue growth related to new customers as a key metric makes sense because new clients - clients lost = net new business revenue (profit).
To increase net new sales/business, you will need to reduce your customer churn rate. It’s as simple as that.
5. Customer Acquisition Cost (CAC)
Making money costs money. Your CAC is an effective metric for determining exactly how much money you’re spending to build your customer base.
It’s a highly efficient way to measure business success and failure albeit quite difficult to accurately record because of its many variables.
CAC includes any cost involved in attracting customers. This includes advertising and marketing, product research and development, sales meetings and distribution channels.
If you can accurately determine all these variables, the CAC can be calculated by dividing all the costs spent on acquiring new customers by the number of customers you actually acquired during the time this money was spent.
6. Customer Maximisation
When a company matures, growth should be a combination of new customer acquisition and existing customer upgrades and add-ons, referred to as Customer Maximisation.
Companies that perform strongly typically recognise that a substantial part of their revenue and profit growth comes from existing customers. Therefore, selling new products to existing customers can prove critical for overall growth.
Take the time to stop and objectively assess where your business stands today and identify the actions to take to grow your business successfully.
WANT TO KNOW MORE?
Selina Bolton is a business strategist and the founder of Seed.Partners; a mergers & acquisitions firm specialising in attracting investment and creating opportunities for small to medium-sized businesses to scale and build value at pace.
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