Revenue Metrics

Last but not least important, you also need to read and learn about RevenueMetrics.
How much revenue and net profit did your start up produce? And how much revenue per user? These are all the questions that we have prepared the answers for in this article.

Customer Lifetime Value

Theory

The customer lifetime value (LTV) shows the net profit you can expect from one customer over his/her lifetime (Datarockets, 2019) (Jordan, J. et al., 2015). A reason why it is essential to track LTV is to obtain a clear understanding of how much value you generate per customer after subtracting CAC (Jordan, J. et al., 2015).

Application

Start by analyzing your overall + your LTV for the individual customer segments (Skok, D., 2019). In order to calculate the LTV you need two metrics:

• Contribution margin per customer per month = Revenue per customer per month — variable costs associated with a customer
• Average lifespan of a customer = 1/monthly churn

Practice

• The focus of seed rounds is to achieve actual revenue and top line growth rates, but also seed stage investors look at unit economics (Lang, M., 2020).
• Usually, a cut off after two to three years is taken for lifetime value. Everything beyond this is hard to predict.

LTV:CAC Ratio

Theory

The ratio of these two metrics indicates the level of sustainable growth of your business (Datarockets, 2019). It essentially tells you if the profits from customers exceed your costs of acquiring them (Skok, D., 2019). If your LTV is higher than the acquisition costs, your business is sustainable (Samani-Sprunk, T., 2020).

Application

• Start by analyzing your overall + your LTV:CAC for the individual customer segments (Skok, D., 2019).
• Look at CAC and LTV individually (overall and per customer segment) to see which levers you can take for optimizing the overall ratio (Skok, D., 2019).

Practice

CAC should be lower than LTV. However, in the beginning you probably don’t know the value of your customers (Yin, 2020).

The Average LTV:CAC ratio is around 3:1 and hypergrowth LTV:CAC 5:1 (Samani-Sprunk, T., 2020). CAC should be recovered in about 5 to 7 months (Skok, D., 2019).

In addition to financial metrics CAC, LTV and CAC:LTV are important to know. When it comes to benchmarks usually the rule of thumb of 3x LTV > CAC applies. Working with your own realistic assumptions on customer churn and LTV is important to paint a valid picture (Christopher Zemina, 2020).

LTV, CAC and LTV:CAC ratio need to be monitored carefully with the gold standard being 5X LTV > CAC which only very few startups manage to achieve.

How to decrease your CAC?

• Focused target market
• Customer referrals
• Inbound marketing
• CRO
• Differentiation to competition
• Increased brand awareness
• Use freemium or free trials
• Optimize customer acquisition
• Capitalize on referrals — if possible
• Automate sales processes
• Use demo videos — reduces the amount of salespeople needed to explain a product (Skok, D.., 2019).

Ways to increase your LTV:

• Cross- and upselling
• Increase referrals
• Reduce churn
• Add repeat business
• Determine the main source of customers with high LTV and pinpoint your ideal target group.

Revenue

Theory

Revenue indicates the total value of all sales in a given period (Datarockets, 2019). A more in-depth analysis can be achieved by measuring the return on investment (ROI) which equals revenue per dollar spent. In the end, it’s about showing the effectiveness of your actions and achieving your business objectives (Dopson, E., 2020).

Application

Measuring revenue growth is an important fact across all business models, especially in the stages MVP, Scaling and in established businesses. Letters of intent or bookings are not part of revenue (Jordan, J. et al., 2015).

Monthly Recurring Revenue

Theory

This is the monthly sum paid for subscriptions for your offering. MRR provides a profound basis for revenue predictions which is of high interest to external stakeholders such as investors. Moreover, it is important to continuously track the ratio of total revenue vs. MRR as it indicates the level of stability of the revenue stream (Datarockets, 2019).

Application

Business models in IoT and subscription-based businesses need to monitor this metric across various stages from MVP, scaling up to established businesses. Do not factor in non-recurring fees, such as setup or hardware (Jordan, J. et al., 2015).

Practice

Depending on the business, it can be distinguished between different types of recurring revenue, either on an annual or monthly basis. When reporting ARR/MRR it is important to differentiate between bookings and revenue. Revenue signals the amount of cash in the bank whereas bookings show the picture of revenue made in a year. This means the booked revenue equals € 1M in 2020 but the ARR for 2020 is actually € 1M divided by 3.

MRR Growth

Theory

MRR growth for SaaS business is easy to track due to its recurring nature (Law, 2016). In order to make an in-depth analysis and to better understand what drives MRR it makes sense to break it down into New MRR, Expansion MRR and Churn MRR (Datarockets, 2019). A stable MRR growth rate is indicating exponential growth, as it needs higher revenues each month to sustain the same level of the previous months (Law, 2016).

Application

Additionally, you can analyze your overall + your net new MRR for the individual customer segments (Skok, D., 2019). Then calculate the individual contributions to your MRR. Finally, you can derive the Net New MRR which shows you the additional MRR generated.

• New MRR = Σ revenue from new subscriptions
• Expansion MRR = Σ revenue from subscriptions from up or cross-selling
• Churn MRR = Σ of lost revenue due to canceled subscriptions
• Net New MRR = New MRR + Expansion MRR — Churn MRR (Law, 2016).

Practice

Fintech startups need to focus on MRR, MRR growth, gross payment volumes, unit economics, EBITDA, and net income to indicate monetization and show the way towards profitability.

Especially, for B2B SaaS and Consumer Tech companies in the seed stage it is essential to prove their potential to achieve recurring revenue. An important distinction to make is product and consulting revenue. Product revenue has the potential to scale whereas consulting services are usually one off. So, the background of the achieved growth is important.

Annual Contract Value

Theory

Annual Contract Value (ACV) is the annual revenue per user per contract (Baremetrics).

Application

• Customer A has signed a 3 year contract worth $36,000, therefore, the ACV is $12,000.
• 100 customers subscribed to a monthly plan and pay $100 per month. Here the ACV is also $12,000 (Baremetrics).

Practice

• DEEP TECH: An ideal benchmark in the deep tech industry is an ACV of 100k. ACV will gradually improve over time with a higher customer satisfaction. Thus higher ACV volumes can be expected after the second or third year after a contract has been signed with a certain client.
• FINTECH: For fintech companies selling to enterprises ACV is essential in the pre-seed phase. They need to show the ability to expand a deal in the distant future by horizontal expansion or upselling. This can be assessed through reference calls with industries to understand their types of usage in practice.
• B2B: For B2B seed stage companies at least one customer should have converted and proven the in the pre-seed projected ACV and 2–3 customers should be in the pipeline with a clear approach on how to reach them and how to expand the feature set.
• SEED TECH: ACVs should be monitored closely in the seed stage. Meaning, what are the ACVs, how are the contracts structured and who are the buyers for startups in the industry space.

Average Revenue Per User

Theory

ARPU gives you the average monthly revenue per customer/ user (Skok, D., 2019). There are two different use cases on how to apply this metric. Firstly, when a later stage is reached, startups often implement additional monetization strategies such as upselling. Secondly, ARPU can be used for experimenting with different users to find the optimal customer (Datarockets, 2019).

Application

• Simply calculate ARPU as stated below
• Monitor it over time for different customer groups (Skok, D., 2019).

Burn Rate

Theory

This metric shows you how much your cash has decreased within a month (Datarockets, 2019). Net burn includes incoming cash minus gross burn, which takes into account all monthly expenses and other outlays (Jordan, J. et al., 2015). Growth burn on the other hand also accounts for marketing expenses for the acquisition of new users (Law, 2016).

Application

Runway

Theory

When looking at the runway, you can see the number of months until you run out of cash (Datarockets, 2019).

Application

This would be all regarding the metrics needed for your start-up. They are all very useful for tracking performance. Share with us all your experiences and opinions. What have you learnt using these metrics?

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