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4 key metrics to monitor your SaaS or subscription business

April 4th, 2017 Posted by alastair, blog 0 comments on “4 key metrics to monitor your SaaS or subscription business”

written by alastair barlow [blog]

this article is not for the faint hearted – it gets a little technical and involves detailed calculations on the metrics I see as most important when running a subscription or SaaS based business.

this is the follow on article from ‘why every business should consider a subscription model’ where I will delve into more detail around how to calculate what I see as the most important metrics when running a subscription or SaaS based business. however, it should also be read in conjunction with 9 metrics to excite potential investors to get the most out of it.

  • ARPU (average revenue per user)
  • AMPU (average margin per user)
  • MRR (monthly recurring revenue)
  • CCR or RCR (customer churn rate, revenue churn rate) sometimes specified as a period and referred to as monthly churn rate

average revenue per user (ARPU)

ARPU is a number which you will want to see increase over time. quite simply it shows you the average revenue each of your (average) customers is generating for you. if you have multiple products or services, it would be beneficial to calculate ARPU by these different products. equally, not all customers are created equally – if you have different types of customers, you may be interested in segmenting your customer demographics to understand ARPU by customer segment. this is particularly useful to use when setting a strategy to target new customers.

example

  • we have 2 different products, basic and premium.
  • we also have 2 basic customer segments. young professional and family orientated.
  • basic product sells for £25 per month. we have 55,000 family orientated subscribers and 40,000 young professional subscribers.
  • premium product sells for £40 per month. we have 2,000 family orientated subscribers and 25,000 young professional subscribers.
  • total basic product subscribers are 95,000
  • total premium product subscribers are 27,000

total ARPU: total revenue / total users = ((£25 x 95,000) + (£40 x 27,000)) / (95,000 + 27,000) = £28.32

however, the £28.32 is a blended ARPU across our entire customer base. if we break this down by segment it tells us something more insightful.

family orientated segment ARPU: family orientated segment revenue / family orientated segment subscribers = ((£25 x 55,000) + (£40 x 2,000)) / (55,000 + 2,000) = £25.53

young professional segment ARPU: young professional revenue / young professional subscribers = ((£25 x 40,000) + (£40 x 25,000)) / (40,000 + 25,000) = £30.77

be warned that metrics should not be viewed in isolation

while on the face of it total blended ARPU is £28.32 drilling down to segmented customers and understanding ARPU by these segments gives us even more insight into our average revenue per segmented user. on the face of it, it would appear that we should be taking actions to target the young professional segment rather than the family orientated segment based on the £30.77 average revenue per user compared to just £25.53. however, be warned that metrics should not be viewed in isolation – which brings me on to the next metric of interest AMPU.

average margin per user (AMPU)

this is very similar to ARPU. however, if the business is a more traditional business operating a subscription business e.g. food snacks, you would also be interested in the average margin per user i.e. average revenue – average direct costs or cost of sales. if we continue with the above example and assume there is a cost for each sale made i.e. a product cost, we can work through an example.

example

  • basic product sells for £25 per month and we have 55,000 family orientated subscribers and 40,000 young professional subscribers.
  • premium product sells for £40 per month and we have 2,000 family orientated subscribers and 25,000 young professional subscribers.
  • basic product costs us £5
  • premium product costs us £23
  • total basic product subscribers are 95,000
  • total premium product subscribers are 27,000

total AMPU: (total revenue – cost of goods sold) / total subscribers = ((£25 – £5) x 95,000) + ((£40 – £23) x 27,000) / (95,000 + 27,000) = £19.34

family orientated segment AMPU: family orientated segment revenue / family orientated segment subscribers = ((£25 – £5) x 55,000) + ((£40 – £23) x 2,000) / (55,000 + 2,000) = £19.89

young professional segment AMPU: young professional revenue / young professional subscribers = ((£25 – £5) x 40,000) + ((£40 – £23) x 25,000) / (40,000 + 25,000) = £18.85

drilling down to the right level can help you make more informed decisions

now, taking both ARPU and AMPU into account – which segment would you chase? the segment with the greater revenue per user, or the segment with the greatest margin per user? it goes to show that drilling down to the right level can help you make more informed decisions. now it depends what your strategy is – do you want top line growth, or are you focused on margin? at least now, you are able to make an informed decision because you have the information and insight to make those decisions.

monthly recurring revenue (MRR)

your business may have different revenue streams. there may be one off revenues such as one-time purchases or upfront implementation fees. however, what we are interested in here is the revenue in that month that is predictable for future months, based on subscribers. given this, you will be able to reliably predict what your minimum revenue will be in subsequent months as it is, by definition, recurring (save for any customer churn, which we will go into below). MRR is a number you want to see grow month on month as it’s a good overall growth indicator.

customer churn rate (MCR) or revenue churn rate (RCR)

customer churn rate and revenue churn rate are numbers you want to see as low as possible. customer churn rate measures the number of customers you lose relative to the total number of customers in a given period (before new customers are accounted for). revenue churn rate measures the amount of revenue you lose relative to the total revenue in a given period (before new revenues are accounted for). typical periods used are monthly, quarterly or annual. many businesses run different types of products and so customer churn rate and revenue churn rate are not always the same, largely due to the fact the price for each product is different. Let me walk you through an example…

example

  • we have 2 different products, basic and premium.
  • basic product sells for £25 per month and we have 95,000 subscribers
  • premium product sells for £40 per month and we have 27,000 subscribers
  • total subscribers are 122,000
  • in month 1 we lose 5,000 subscribers from our Basic product and 250 subscribers from our Premium product.

customer monthly churn rate: monthly churn rate = total lost subscribers in the month / total number of subscribers at the start of the month = (5,250 / 122,000) x 100% = 4.30%

revenue churn rate: revenue churn rate = total lost revenue across all products in the month / total revenue across all products at the start of the month = ((5,000 x £25) + (250 x £40)) / ((95,000 x 25) + (22,000 x 40)) = 145,000 / 3,255,000 = 4.15%

so we can see that while we are losing customers at a rate of 4.30% per month, our revenues aren’t affected by the same degree because we can see from the product split that our customer churn in our premium product is less. to prove this, we can look at customer churn by product.

basic product monthly churn rate = basic product lost subscribers in the month / basic product number of subscribers at the start of the month = (5,000 / 95,000) x 100% = 5.26%

premium product monthly churn rate = premium product lost subscribers in the month / premium product number of subscribers at the start of the month = (250 / 27,000) x 100% = 0.93%

using your metrics to get value from your model

so with these four metrics, you’ve now got a lot more insight into not just how well your model is working, but what decisions you’ll need to make around continued growth. for example, based on the metrics around your two main user segments, there’s already a decision to be made on whether to focus on the young profession market – which brings in more revenue per user – or the young families market which provides better margin. in each case, the marketing and promotional decisions are likely to look quite different.

elsewhere there are other decisions to be made. for example, given the much lower churn rate of the premium product, is it worth creating an introductory upgrade offer or trial to encourage more people to switch to the premium product? or would you want to adjust the price point of the basic product to see if that improves retention?

now over to you, are you tracking each of the above metrics at the right level to make informed decisions on your strategy?

thanks for reading – if you have any comments or questions on the above, or are interested in talking to us, please get in touch.