I’d like to share six very important things you should be measuring in your recurring revenue web app.
We launched TVM several months ago and it’s going (thankfully) amazingly well. After launch, the biggest challenge became the ability to identify, track, digest and act upon key metrics.
After a lot of discussion with old pros like Mike McDerment of Freshbooks (who has grown his company to 45 people and tons of profit) and a lot of Google Spreadsheet wrangling, I’ve come up with a useful blueprint for anyone running a recurring revenue web app.
I’ll explain the six key metrics first, and then give you the link to the Google Spreadsheet. You can make a copy of the sheet and modify it for your own app.
1. Churn
Churn is the % of customers that cancel each month.
Calculation: number_cancellations_this_month / total_number_paying_customers
This will vary wildly depending on what kind of app you have. For example, if you have a product that does invoicing, your churn rate will be very low because once someone starts sending invoices with it, they won’t want to switch to another invoicing app or cancel their account, as it could affect their customers.
If your app provides entertainment (like Hulu) then it’ll be the first thing people cancel if they need to cut their monthly costs.
Based on my experience, you should aim for a Churn Rate of 5% but anywhere between 1% to 10% is normal.
You can calculate another interesting number based on Churn, which is Average Customer Lifetime (the average number of months that a customer stays with you before cancelling). The calcuation is 100 / churn_percentage. Example: if your Curn is 5%, then your average customer lifetime is 20 months (100/5). This figure will be used to calculate LPC which we talk about below.
2. CMRR
CMRR is ‘Contracted Monthly Recurring Revenue’.
Calculation: (total_number_paying_accounts – number_cancelled_paying_accounts_this_month) * monthly_price
You should be aiming for a monthly growth of around 5% growth (after Churn) in your CMRR. Initially it will be much higher, as your revenues are low, but it should settle down to about 5% growth each month.
Keep in mind that your CMRR has to keep pace with your Churn, or you will actually start losing money.
3. Cash
Cash is good old fashion money in the bank.
Calculation: cash_at_end_of_last_month + (CMRR – total_monthly_costs)
This is pretty self explanatory, but you should be watching this like a hawk to make sure you don’t run out of money. Most likely this will be a negative number for the first several months until you claw your way to profitability.
With TVM, we’re aiming to be cashflow positive on a monthly basis after six months.
4. LPC
LPC is ‘Lifetime Profit per Customer’.
Calculation: See the Google Spreadsheet (it’s complex!)
This is a pretty tricky number to compute, so I got a little help from Marc Roberts (of Neutron Creations) on this.
Essentially this helps you understand how much profit each customers brings you, after all your costs. It takes into account things like Churn and Average Customer Lifetime.
This figure should grow over time but if it becomes too high, then it’s an indication that you’re not investing enough back into the product for improvements or customer support.
Typical numbers for SAAS apps range from 50% – 70% net profit (which is insane when you compare them with traditional businesses).
5. CACR
CACR is ‘Customer Acquisition Cost Ratio’.
Calculation: See the Google Spreadsheet (it’s complex!)
This is a ratio that tells you how long it takes to recoup your marketing costs. There is a great PDF by Bessemer Venture Partners that dives into this in detail (download here). Their suggestion is that you don’t want this number above 1.0 because if it is, you’re not spending enough on marketing. However, I think you should be more profitable, and thus see this number well above 1.0.
In general, this is a really useful number to see how aggressively your re-investing back into the company to grow the user base and revenues. If it’s too low, then you’re not making enough profit. Too high, then you’re not spending enough on marketing.
6. CPA
CPA is ‘Cost per Acquisition’.
Calculation: marketing_costs_this_month / number_new_paying_users_this_month
A lot of venture backed companies are told to spend up 10 – 12 months of customer revenue to acquire a new customer. So if a customer pays you $25 per month, then you should be prepared to spend $250 – $300 to acquire them (this obviously assumes you have a LPC that’s much higher than that).
I believe that is too high and we aim for CPAs around 1 – 2 months revenue. This view is shared by several very successful web app entrepreneurs in this space (who all happened to bootstrap their companies).
The Spreadsheet
To tie it all together, I’ve shared the final spreadsheet with you via Google Docs. I hope you find it valuable and would love to hear your feedback and opinions.
View the ‘SAAS Model’ Google Spreadsheet
