Optimization and improvement can take place only when you constantly measure the impact of your growth activities. Let’s look at the five crucial growth metrics you need to track.
Monthly Recurring Revenue (MRR)
Subscription-based businesses generate a major amount of revenue from recurring customers. MRR gives you the month-over-month revenue collected from recurring transactions (or renewals). A growing MRR facilitates a stable cash flow for your business. MRR is calculated by summing up the recurring revenue you receive in a month.
Churn is the number of paying customers who unsubscribe to your product. An increasing churn rate would paralyze your business and bring it to a permanent halt. This impacts your recurring revenue, and active paid user count, both of which are dangerous to a business. There are multiple ways to calculate churn, here is a simple formula,
This formula can be expanded to any time-frames (quarter, year, etc).
The easiest way to reducing churn is by gathering customer feedback, understanding their likes and dislikes, and charting out a set of action items.
Reducing churn rates takes a considerable amount of time and effort.
Customer Acquisition Cost (CAC)
CAC is the amount of money you spend to acquire a paying customer. This includes the marketing and sales expenses. The best practice is to always find ways to reduce CAC and increase conversions. For this, you need to identify the channels where you acquire a majority of your customers with the least acquisition cost. Optimizing this would put you on the right path. CAC is calculated by,
Average Revenue Per Account (ARPA)
To say in simple terms, ARPA is the average revenue you receive from a customer per month. ARPA is used in multiple calculations to derive other SaaS metrics. The ARPA trends are crucial in determining the growth of your product. It is calculated by,
Customer Lifetime Value (CLV)
CL is the average tenure that a customer is likely to do business with you. CLV is the monetary value that you derive from the customer. It helps you make major budget decisions related to sales, marketing, development, and support/maintenance. One of the simplest ways to calculate CLV is,
A correlation between CLV and CAC can be made to better understand the value of your paid customer, profit, and loss incurred by your business. They can be correlated as,
CLV - (CAC+Operational Costs) = Value of a customer
1. You’re gaining profits from each customer if the final number is positive (+)
2. You’re incurring a loss from each customer if the final number is negative (-)
The finest way to boost the health of your business is to decrease the CAC, operational costs, and increase the CLV.