What is MRR?

MRR is short for Monthly Recurring Revenue, which is calculated using subscriptions or a predictable revenue stream (plans for this post). It excludes one time payments, discounts, refunds or non contracted revenue. Since MRR reports revenue across dissimilar plan terms, reporting can challenging. We automatically account for these challenges with our a proprietary algorithm that normalizes the contributing elements used to calculate MRR. Also, since we integrate directly with payment providers and can calculate MRR in real time, we report REAL MRR, not theoretical (link) Since this is a key metric on the current performance of your business, we want it to be as accurate as possible.

Here’s how we calculate it: MRR = (ARR(Normalized)) + (Plans(Normalized))

It is important to note that MRR is not GAAP Revenue. The difference tends to cause confusion for many organization and their finance departments.

To ensure clear business discussions, we’d suggest using the term “GAAP Revenue” for discussions relating to accounting and income performance, and “MRR” for subscription metrics and analytics.

What is CLV?

CLV is short for Customer Lifetime Value; an estimate of the projected total value of a customer to your business. To be as accurate as possible, we use a proprietary algorithm to derive the present value of a customer using actual historic values and predictive modeling. This is far more accurate than most calculations that merely account for averages against churn.

Here’s how we calculate it: CLV = ARPU (Historical + Predictive) / Churn

Why is this so important? 

Understanding CLV will help you determine how much you can spend to acquire a customer, how much support you can/should offer that customer, and ultimately how sustainable your business model is over time.

Here are two examples:

Your SaaS business has an ARPU (Average Revenue Per User) of $125, and churn is 3%, your CLV is $4,166. Your cost per acquisition will basically tell you if this is a great customer or not. If you acquired the customer for less than $1,000, this should be a profitable customer. Go get more of them right now.

Your SaaS business has an ARPU of $650, and churn is 16%, your CLV is $4,062.50. Compared to the above example, the CLV is pretty close even though the ARPU is much higher. However, you can see how high churn can really hurt the overall value a business obtains from its customers.

What is ARPU?

ARPU is short for Average Revenue Per User. Basically ARPU is the average revenue you make from a user over a particular month.  This is a simple, yet powerful metric that can inform many different areas of your business.

To be as accurate as possible, we use Active Users to calculate ARPU, and use our Customer Profiles to combine any users who have multiple plans/transactions into 1 Active User.

Here’s how its calculated: ARPU = MRR / Active Users

Why is ARPU important?

Measuring ARPU is important because it’s a key indicator of both revenue source and margin growth, and informs analysis of whether or not you are going to hit your revenue targets. A higher ARPU is also indicative of how successful you are at up-selling/cross-selling additional services to individual customers.

What is an Active Customer?

An Active Customer is someone who has transacted with your business during a given period of time. Typically, these are customers that are either under a subscription plan, or who have made a purchase during the Average Purchase Timeline.

Our Customer Profiles and Customer Persona contain a lot of information on your customers, (both individually and on the aggregate), which we use to compute Active Customer. We use a proprietary algorithm to understand what the Average Purchase Timeline is for you customer base, and then identify Active Users as part of a Custom Audience.

Since the number of Active Users is a key part of other metrics such as ARPU, CLV we take extra care to ensure we are delivering the most accurate information.

What is Churn?

Churn is the measure of attrition or loss over a specific period of time. While you can measure a lot of different things to calculate churn, we focus on customers (lost/won).

Here’s how we calculate it: Churn = Lost Customers @End / Total Customers @Beginning

We express churn as a ratio, which is the inverse of your renewal rate. For example, an 86% renewal rate is equivalent to a 14% churn rate.

Churn can be used in a variety of ways to inform business decisions, such as:

  • Assessing the value your customers are attributing to your product (more churn = less value)
  • Calculating Customer Lifetime Value calculations
  • Projecting revenue and cash flow

Churn is a good measure for optimizing pricing, product, promotions and other decisions that maximize revenues and business performance.

To truly understand the importance of measuring churn, check out this post by Tom Togunz: Why negative churn is such a powerful growth mechanism.