20 Essential Metrics That Every Chief Revenue Officer Needs To Know
Chief Revenue Officer’s (CRO) role is extensively broad and that’s why it is crucial that the most important aspects of their role are defined. For CROs to survive and ensure the scalability and growth of a company, there are some key vocabulary and metrics that they must be familiar with.
Here’s an essential list of the top 20 metrics that will guarantee a structured path to success for any CRO.
1. Annual Recurring Revenue (ARR)
An Annual Recurring Revenue is the amount that adds up to the revenue of a company in regular intervals, over a period of one calendar year. The Monthly Recurring Revenue (MRR), when multiplied by 12, gives the Annual Recurring Revenue.
Let’s say that a customer subscribes to a service for three years. If they are paying $600 in total and $150 is a one-time payment for support services, the annual recurring revenue here would be $200. We have to note that the one-time payment is not recurring every year and therefore excluded from ARR.
2. Annual Run Rate Revenue (ARRR)
Annual Run Rate Revenue (ARRR) is calculated by multiplying monthly or quarterly expected earnings into an annual figure.
For instance, you could tally up sales from a specific month or quarter and use this to extrapolate a projected annual revenue.
This is what the calculations look like:
Expected Monthly Revenue for 12 months = Annual Run Rate
Expected Quarterly Revenue for 4 quarters = Annual Run Rate
If a SaaS startup made $20,000 in overall revenue from professional services in the month of June, the annual run rate would be calculated by multiplying that earning by 12.
$20,000 x 12 = $240,000
The ARRR usually takes into account professional service and additional revenue streams.
Make sure you do not confuse the ARRR with the ARR, as these are two completely different metrics.
3. Average Revenue Per User (ARPU)
Average Revenue Per User, as the name suggests, is the average amount of revenue recorded for one use in a month.
If a digital marketing company makes $200,000 a month and it has 5,000 customers, the ARPU would amount to $400.
4. Average Selling Price (ASP)
This is the average amount that your product is sold for. The duration could be a week, a month, or a year, chosen as needed.
If your company sold 500 products and the overall net sale amount is $50, the ASP would be $0.10.
5. Bookings
Bookings are the calculated dollar equivalent amount of anything won, signed, or committed to in a deal. Both the subscription-based and non-subscription based deals come under this.
If your 10 sales executives have each closed $50 in software subscriptions and professional services in a given month, you would say that your overall booking for the month is equal to $500.
Keep in mind that bookings don’t translate into revenue right away, as the product or the service usually needs to be delivered before it becomes invoiceable and then translated into revenue.
6. Burn Rate
The Burn Rate is the rate at which a startup makes its expenses on a monthly basis. Usually, its funds are cash investments from venture capitalists or angel investors.
Let us say that a company is operating at a loss. If the total amount of funds left is $200,000 and the burn rate is $50,000 month, the company will run out of money in just four months.
7. Customer Acquisition Cost (CAC)
The Customer Acquisition Cost is the average cost incurred to acquire customers under specific channels like business development and marketing. It is calculated by dividing the total amount spent by the total number of customers, specific to each vertical of business.
If a company spends $20,000 on sales and marketing, which includes commissions, salaries, and advertising bills and 50 customers have subscribed as a result, the CAC would be $400.
8. Churn
When customers cancel subscription-based services, the rate at which they do it at is called Churn or Churn Rate.
Assuming that a company has 300 customers at the beginning of the month and only 250 by the end of it, the monthly Churn is the ratio of this difference to the number of customers at the beginning of the month.
Let’s do the math:
(300–250) ÷ 300
= 50 ÷ 300
= 6%
9. Customer Lifetime Value (LTV, CLTV, or CLV)
The Customer Lifetime Value is the difference between the amount in recurring profit stream and cost incurred to acquire a customer.
To calculate the LTV, 3 variables have to be considered: Average Revenue Per User (ARPU), Gross Margin, and Churn Rate. Multiply ARPU with the percentage of the Gross Margin and divide that by the Churn Rate
For example, if a customer pays $100 a month for a software subscription and the average gross margin is 75% with a 3% Churn Rate, the LTV can be calculated by:
(100 x 75%) divided by 3%
=$2,500.
10. Cohorts
Cohorts refer to the set of customers who have a set of similar characteristics, and therefore can be grouped into the same category.
You should consider specific datasets or behavioral analytics to break your users or customers, into related groups, especially if your product is a SaaS platform.
If done properly, a Cohort Analysis can help you optimize the Retention Rate, predict the LTV, and advise your marketing team on how to conduct optimal targeted campaigns.
11. Customer Retention Cost
The total amount of money spent on retaining the customers throughout the course of a deal is the Customer Retention Cost.
If your startup spends $10,000 to retain 500 customers, the customer retention cost would be $20.
The key challenge is to group all the operational expenses that contribute to customer retention. These can include the cost of your customer success team, the cost of platforms or tools in place to support retention, as well as the cost of marketing initiatives aimed at retaining customers.
12. Customer Retention Rate
This is the opposite of a Churn Rate. The Customer Retention Rate is the percentage of customers retained, relative to how many of them signed up at the start of a deal.
If your startup closes its fiscal year with 100,000 customers but opens with 98,000, your Customer Retention Rate would be 98%.
Things can get slightly more complicated if your startup is not ready to distinguish between the Customer Retention Rate from the Customer Renewal Rate, or if your startup operates under a freemium revenue model. In this case, you might want to track the User Retention Rate — unless you decide to define non-paying users as “customers”.
13. Monthly Recurring Revenue (MRR)
This one is always an investor’s favorite. The MRR is the final and total amount of revenue of the company for one month, excluding the non-recurring costs like professional services.
If a customer is paying $100 a month and another is paying $200 a month for software license subscriptions, the monthly recurring revenue is $300.
The MRR can be distinguished into net new and cumulative. The first is the amount of MRR contracted in the current month, while the latter includes the net new and the renewals of the MRR.
14. MRR Churn
MRR Churn is typically the revenue amount lost because of canceled software subscriptions and deals in a given month.
Assuming that the MRR of a company at the beginning of the month is $100,000 and at the end of the month is $75,000, the MRR Churn rate is calculated by dividing $25,000 by $100,000 and therefore would be 25%.
15. Customer Renewal Rate
A Customer Renewal Rate is the rate of customers that renew their subscriptions, typically using a count of customers who canceled and those that did not.
Some startups tend to cluster the Customer Renewal Rate with the Customer Retention Rate, but these are different metrics. It can depend on the stage your startup is in, and the way you like to track metrics. Some startups adopt a Freemium revenue model. For those, it makes sense to track a User Retention Rate and the Customer Renewal Rate.
16. Revenue Backlog
The revenue that has been lagging behind over the duration of a contract is called a Revenue Backlog, sometimes referred as unrecognized revenue.
The Revenue Backlog includes the Committed or Contracted Revenue that still hasn’t materialized due to the customer or internal-related matters.
If you have $300 worth of Contracted Revenue that hasn’t materialized due to non-completed delivery of products or professional services (e.g. implementation or training), your backlog would then amount to $300.
You need to make sure you align with your Operation Executive in order to ensure you can turn this into actual revenue.
Revenue backlog is usually a shortcut to increase your startup revenue as it is what sales people like to call low-hanging fruit.
17. Revenue Churn
The Revenue Churn is the loss of revenue amount in its dollar-equivalent, considering all the lost deals and subscriptions.
Assuming that the revenue of a company at the beginning of the month is $100,000 and the loss of revenue due to cancellations in subscriptions is $10,000. The Revenue Churn rate for that month would be 10%.
You can calculate the Revenue Churn either annually or quarterly.
For some startups, it makes sense to track the MRR Churn as this indicates the revenue churn caused by software subscription losses.
18. Revenue Recognition
Although this is mainly an accounting metric, it is helpful for CROs to have visibility on it.
In an MRR-drive startup, the revenue is recognised on a monthly basis, according to the subscription date.
If your startup acquires 10 customers with $100 worth of annual software subscriptions starting from January, the revenue recognized for that month will be equal to $1,000 (given that all customers pay the same subscription rate).
19. Runway
This is the one that the C-Suite typically doesn’t want to think about. But for CROs, it is one of the most observed metrics.
The Runway is the amount of time a company has to sustain its operations, at the current and corresponding cash burn rate.
In other words, how long does your startup need to take off before it runs out of money?
If your cash reserve is $1 million and you are burning $100,000 a month, you have a 10-month Runway. You want to make sure that you prepare a new round of funding or pivot your revenue strategy at least four months before the end of your Runway.
20. Total Contract Value
The sum of a one-time payment, implementation charges, and the recurring payments, is the Total Contract Value (TCV).
If a customer subscribes to a service for three years and they pay or commit to $6,000 in total and $1,500 to a one-time payment for support services, the total TCV would be equal to $7,500.
This article was originally published on Forbes Middle East. Click here to read the original version.
