If you’ve started an Software / SaaS business, we don’t have to tell you what a smart choice you’ve made: the market for software as a service businesses is expected to reach $164.39 billion by 2022. That’s a 2016 prediction; we wouldn’t be surprised if it ends up exceeding that amount.
After all, in late 2019 the market had already topped $100 billion! Not a far stretch to say it will pass $164.39 billion in less than two years, is it?
Yet with the growth in SaaS comes competition
So if you’re going to competitive in this growing industry you’re going to need to know three critical metrics:
• ARR (Annual Recurring Revenue)
• MRR (Monthly Recurring Revenue)
• Churn Rates
Why? You need to measure the correct metrics at the correct time because as a SMB B2B software enterprise, your margin for error is extremely small when you’re competing in a sea so large. Therefore, the more you understand these top three metrics, the better chance you have of watching them carefully, correcting course when they wobble, and rising to the top as you keep a close eye on them.
Annual Recurring Revenue shows you how much your subscribers bring in for you over the course of a year. This often is used by businesses that have subscribers, such as publishers, annual service providers, and so on.
SaaS companies almost explicitly use ARR because of the defined contract length these companies tend to have with their customers. ARR is useful especially as a revenue indicator because it can show the relative health of your business: the more long-term, repeat business you have, the better.
Calculating ARR also is straightforward. As an example: one of your customers has a monthly subscription for $350/month on a two-year contract. Your ARR with them is $8,400 over the two years of the contract, or $4,200 per year.
You also want to be aware of important categories in your ARR. They are New, Lost, Expansion, and Contraction. Watch these carefully as they can portend the future and how fast – or slowly – your business may grow… or contract.
Just like ARR, Monthly Recurring Revenue measures a regular and predictable revenue stream. It accurately reports your business’ performance over a number of different monthly subscription types.
As just one example: let’s say your B2B software company has different levels and kinds of customers. Some became customers during a discount promotion. Still others have decided to upgrade the services you provide them.
It’s hard to measure ARR growth with these types of customers due to the changes in their payments from one month to another one or more times in a year. But MRR lets you easily arrive at a growth – or reduction – rate fairly easily.
You’ll want to watch two important MRR examples:
• Average revenue by user, in which you ascertain the revenue you receive per customer per month by the total number of customers you have. As an example, let’s say you have 20 customers who pay $350/month each year while another 13 upgraded to a $475/month subscription. Per month, you have revenue of $13,175.
• Customer-by-customer calculations, in which you figure out your revenue per customer per month. So in the case of one client paying you $350, another paying your $475 and another to whom you gave a big discount for a 5-year contract and so is paying $200/month, you have a monthly income of $1,025.
What is Churn?
Your churn rate basically is looking at the turnover (loss) in customers, subscriptions, contracts, etc. You count how many customers leave you, contracts not renewed, contracts renegotiated at a lower rate than before, etc.
Churn often is described as a ratio or rate but you also can describe churn with a whole number.
Your churn rate will be very different from any of your competitors because you’ll lose more or fewer customers than they will, yet churn really is relative to your enterprise because you decide what constitutes a loss.
Yet there are certain “universal” churn metrics of which you should be aware:
• Customer churn: How many customers you lose. You measure it by taking the number of customers you have on a certain date and how many you’ve lost by a certain date. You start with 1,274 customers and lose 336, you have an approximate 26.3 percent churn rate.
• Revenue churn: The same as customer churn but using revenue. You have $25,000 in revenue one month and $19,000 in the next and so you have a 24 percent revenue churn rate; this is effective if your software business also performs custom development projects, similar to Aysling.
• Recurring revenue churn: Take a look at your MRR one month and then the next. If you had 1,274 customers paying $350 ($445,900 revenue) and in the next month you lose 336 of them at $350 each (now you have $323,400 in revenue), you have about a 27.4 percent revenue churn.
It’s critical that you ascertain these metrics accurately
Depending on how many customers you have and how much they pay for your services, you can see how hard it can be to figure out your MRR, ARR and churn rates.
Which is why using a robust professional services platform such as Aysling can be wise move. In fact, Aysling is terrific for software and IT groups that manage professional services, particularly those that need a platform to manage their B2B SaaS products and custom development.
Learn more about how Aysling can help your software business accurately keep track of and calculate these three important metrics.
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