Subscription Metrics: From ARR to TCV
The subscription model is fundamentally changing how businesses operate and what it means to be a consumer.
Along with this new model comes new revenue streams, new growth strategies, new organizational roles, new systems, new processes—and a new set of forward-looking metrics. This shift has generated a new set of metric terminology, as well as a reframing of some pre-existing metrics.
Read on for an overview of the some of the most important subscription metrics that every recurring revenue business needs to understand and monitor.
Annual Contract Value (ACV)
Annual contract value, or ACV, typically maps to an annualized bookings number. It is the calculation of all of the total recurring charges on a subscription. For companies that also charge one-time fees in conjunction with recurring fees, the first-year ACV might be higher than later-year ACVs in a multi-year contract.
Annual Recurring Revenue (ARR)
Annual recurring revenue, or ARR, is a subscription economy metric that shows the money that comes in every year for the life of a contract, allowing for predictability of revenue. The ARR is a good measurement of the health of a subscription business.
Attrition
Within the subscription economy, attrition is used to measure customers that voluntarily or involuntarily end their use of a product or service. This is more commonly referred to as churn.
Average Revenue Per User (ARPU)
The average revenue per user is a metric that measures the revenue of an individual subscriber as calculated by taking total revenue for a defined time period and dividing that revenue by the total number of subscribers during that time period. The ARPU is valuable for providing a per user view of revenue. Subscriptions businesses look to increase ARPU.
Calculate ARR
To be able to calculate ARR, you first need to clearly define what ARR means within the context of your business.
ARR is the value of a fixed subscription normalized over the course of a year. For example, if you have a customer who signs up for a one-year subscription for a monthly fee of $25 per month, you calculate ARR by multiplying the monthly fee ($25) by the number of months of payment within the year (12) to arrive at an ARR of $300.
Note that if a customer hasn’t agreed to an annual contract, you cannot calculate ARR – you would instead calculate MRR.
Calculate MRR
Because MRR is not a Generally Accepted Accounting Principle (GAAP), there is no single formula to calculate MRR. But MRR is typically calculated by taking the total of all annual, semi-annual, quarterly, or monthly recurring charges (MRC), subtracting one-time charges or fees to produce the ARR, and then dividing by 12 (for 12 months of the year).
You can also calculate MRR for a single customer by adding all of the MRC for that customer. To calculate total MRR for your business, add up all MRC for all customers. Changes to terms over a contract term or subscription lifetime will naturally change the MRR.
Cash Flow
Cash flow is a revenue or expense stream that changes a cash account over a given period. For a subscription business, inflows usually arise from the sale of a subscription-based product or service.
Cash Flow Forecasting
Cash flow forecasting is important for all businesses – you need to know how much money you can expect to flow into your business. For subscription businesses you need to factor in cash from the following in order to accurately forecast cash flow: existing subscriptions, future renewals, anticipated new subscriptions.
Churn
Churn is a subscription economy metric that measures customer attrition, calculated as the number of customers who have discontinued service during a specific time period, divided by the total number of customers at the beginning of that period. Measured in units or dollars, churn is an operational metric that subscription businesses use to gauge the overall health of their business.
Churn Rate
Churn rate, also called attrition rate, is a measurement of churn, i.e. subscriber turnover. Churn rate is the rate at which a subscription business is losing subscribers.
Committed Monthly Recurring Revenue (CMRR)
Committed monthly recurring revenue is the value of the recurring segment of subscription revenue – generally not including non-recurring revenue. For monthly subscription services, it’s the baseline value for the subscription. CMRR for term-based subscription business is the total value of the MRR from the date of booking through to the end of a given subscription. To make matters confusing, there are no standardized rules for what is included in CMRR or how to calculate.
Contracted Monthly Recurring Revenue
Contracted monthly recurring revenue is essentially the same as committed monthly recurring revenue. The only difference is that the contracted monthly recurring revenue only includes revenue which is contractually guaranteed.
Conversion Rate
The conversion rate is defined differently by different organizations. Generally, it refers to the percentage of users with a status change – e.g from a website visitor to a known lead. Within the context of a subscription business, conversion rate is often used to reflect the percentage of subscribers that go from using a free version of a product or service to a paid version. Conversion rates are very important for subscription businesses to know in order for them to monitor the health of their business as well as to predict future pipeline, growth, and revenue.
Customer Acquisition Cost (CAC)
The customer acquisition cost is the amount a business spends to sign on a new subscriber. The CAC cost includes the cost of the product/service, but also sales and marketing, research, and other related costs. The CAC helps a business calculate the value of an individual customer and how much to invest in the process of gaining each new customer. CAC is also a valuable metric relative to churn.
In a subscription business, you will reach profitability when the contribution from current customers covers the CAC for new customers. In the most basic scenario, customer break-even equals company time to profit.
But, if you lose customers to churn on the revenue side while acquiring new customers at a faster rate on the cost side, then it takes more current customers to cover each new customer.
Customer Lifetime Revenue
Customer lifetime revenue is an estimation of the revenue a business will receive from a customer over that customer’s “lifetime” as a subscriber. Customer lifetime revenue is related to customer lifetime value (CLV), but it’s more of a projection and only measures top-line revenue contributions, without including gross margins.
Customer Lifetime Value (CLV, LCV, or CLTV)
Customer lifetime value estimates the total value of a customer over the course of its lifetime, calculating for both revenue and cost. Traditionally CLV was a marketing metric.
Predicting the net profit associated with a customer is helpful in determining how much to invest in sales and marketing to ensure a return on your investment. As a subscription metric, CLV sees subscribers as assets and is a useful tool in managing and focusing on maintaining long-term subscriber relationships.
Deferred Revenue
Deferred revenue is a metric that refers to revenue which has to be recognized over time (vs earned revenue). When you sell a subscription service, the booked amount is often recorded as deferred revenue, and then, over time, based on specific accounting rules, amounts are moved from deferred revenue to recognized revenue (or earned revenue).
Delta Monthly Recurring Revenue (Delta MRR)
Delta Monthly Recurring Revenue is the change in monthly charges to your customers based on non-consistent subscription structures (usage, upgrades, churn, etc). It shows the changes in customer activity so businesses can adjust their business decisions in the future.
Earned Revenue
Earned revenue is revenue that can be considered “earned” when a sale (of product or service) has been completed at which time the vendor has earned the right to collect the accounts receivable. Note that revenue can be earned even if the payment has not yet been received.
Engagement Score
The engagement score is a metric that measures customer engagement based on activity, product/service usage, etc. The engagement score helps to identify sales opportunities (including upsells and cross-sells) and churn risks. A simple formula for calculating your engagement score is:
(w1*n1) + (w2 * n2) + … + (w# + n#)
With “w” the weight you’ve assigned to a given event and “n” representative of how many times that event has occurred.
Growth Efficiency Index (GEI)
The cost of growth is measured by the growth efficiency index (GEI), which is the sales, marketing, and onboarding costs that are required to earn $1 in additional annual recurring revenue (ARR).
The GEI is one of the most critical subscription metrics to track. The lower the GEI, the better – but it is, of course, dependent on the profits from new revenue.
Life Cycle Renewal Rate
The life cycle renewal rate is the rate of subscription renewals throughout the life cycle of a subscriber contract. This renewal rate is important to track because of its implications on forecasting, pricing and packaging, and more.
Lifetime Value (LTV)
Lifetime value (LTV) is short for customer lifetime value (CLV or CLTV) which estimates the total value of a customer over the course of its lifetime, calculating for both revenue and cost.
Monthly Recurring Charge (MRC)
A monthly recurring charge is a fixed charge subscribers pay monthly for their service plan. MRC is a common type of charge model.
Monthly Recurring Fee (MRF)
A monthly recurring fee is a fixed charge subscribers pay monthly for their service plan. MRF is a common type of charge model.
Monthly Recurring Revenue (MRR)
Monthly Recurring Revenue represents the value of a customer relationship, normalized to a month. Contract revenue normalization is essential to get an accurate measure of growth rate, churn rate, etc. This makes MRR an essential metric and one that is used to calculate other important subscription business metrics like CLV.
MRR Cohort
An MRR cohort is an important subscription metric that measures a group of subscribers beginning in the same month. By looking at the cohort as a group, you can analyze trends and glean important subscription information that can help guide pricing and packaging, sales planning, etc.
MRR Churn
Your MRR churn is monthly revenue that is lost as a result of cancelled subscriptions during a given month. Calculating your MRR churn is a good way to stay on top of the health of your subscription business and help with your revenue forecast.
MRR Churn Rate
The MRR churn rate is your MRR churn as compared to your starting MRR at the beginning of a month period.
MRR Renewal Rate
MRR renewal rate is the rate of renewal for your monthly recurring revenue. The calculation is the MRR of your renewed subscriptions divided by the total MRR of all subscriptions up for renewal during a given month, expressed as a percentage. As a subscription metric, MRR renewal rate can be especially useful within a limited data set.
Net Retention
Net retention is the retaining and growing customer relationships over time (i.e. the opposite of churn). Net retention is at the heart of metrics like net dollar retention (NDR) and retention rate.
Net Dollar Retention (NDR)
Net Dollar Retention is the number of recurring dollars retained. It is a useful subscription metric for measuring churn – and benchmarking churn against other subscription companies. NDR is a reflection of revenue renewal values that factors in both upsells and other increased revenue as well as downsells or other use reductions by subscribers.
New Customer Growth Rate
New customer growth rate is the rate at which you are predictably acquiring new customers. Acquisition is harder to forecast than retention because it’s predictive. Some common tools for predicting new customer growth include conversion rates and site traffic.
Because revenue forecasting is closely related to customer forecasting, the new customer growth rate is an important metric to help you with cash resource management.
Renewal Rate
The renewal rate is the rate at which customers renew, comparing customers who renewed versus those that cancelled within the pool of total potential renewing contracts. This calculation is represented as a percentage that measures retention.
Retention Rate
Retention rate is the ratio (percentage) of the number of retained customers to the number of customers at risk, over a given period.
Revenue Churn
Revenue churn is a metric that measures lost revenue, normalized for MRR across different contract periods. Reducing churn is a goal of every subscription business so it’s essential to track churn and identify churn types, e.g. revenue churn as a result of cancelled subscriptions, which could include cancelled contracts, downgrades, or bankruptcies.
Total Contract Value (TCV)
Total Contract Value refers to the total value of a contract (as compared with ACV which is the recurring value of a contract annually), which includes all one-time and recurring charges. Total contract value (TCV) calculates the total recurring charges over the lifetime of a subscription. For instance, a three year contract billed annually at $50,000 per year has a total contract value of $150,000, assuming no activation or setup fees.