When to be Thankful and When to be Watchful with Recurring Revenue

blog196There are things to be thankful for and things to watch for and today we’re going to talk about things to watch for even though ‘this the season to be thankful (though, let’s be honest, you can find reasons to be thankful throughout the year, but we digress…).

Anyhow, we know, you know, that person over there knows, most everyone knows, recurring revenue business models are trending in the right direction.

Given that, what are the right metrics you should lean on to properly gauge the health of your subscription business and which roads to take on your journey?

A recent article published on the Web Host Industry Review (the WHIR) talks about six such revenue metrics to keep in mind.

The following should be studied at different points in the year and across various product lines to better understand your business. The more you understand, the better you may leverage that gained knowledge to grow your super trendy business.

Annual recurring revenues: To calculate this true source of actual revenue recognition, add up expected total yearly billings of the customers annual subscriptions and usage fees.

Average revenue per unit: To calculate, divide total revenue by the number of subscribers. Comes in handy in determining profitability and growth.

Conversion rates: Calculating the rate of conversation of website visitors who sign up for the free trial and become paying customers will help shed light on current and potential customer behavior, site usability and product popularity.

Lifetime value and customer acquisition cost ratio: These two comparable metrics will elevate the rudimentary study of customer acquisition costs by itself. To calculate the latter metric, add up all sales and marketing expenses and divide by the number of new customers added during that time. Once gathered, the lifetime value metric can be determined by taking the average revenue per account and multiply by gross margin and customer life. If the ratio of lifetime value to customer acquisition costs isn’t three or higher, either the value of individual customers isn’t high enough or acquisition costs are too high.

Customer net profitability: To calculate this telling metric on money earned or lost over a customer’s lifespan, take lifetime revenue of said customer and subtract acquisition costs. Where are your profitable customers, and the like, you should be targeting?

Retention and churn rates: How to measure loyalty and on the flip side, what it takes out of you to initiate future loyal customers? Retention rate is the percentage of customers maintained year to year while churn is the percentage of customers lost year to year. The key, quite obviously, is to have the former high and the latter low. Probably didn’t need financial folks to tell you that one.