Aria teamed up with ten industry experts to get the lowdown on the metrics they believe are most important in a recurring revenue business. The experts were selected based on their expertise and experience in the billing space or implementing a recurring revenue business model in an enterprise business. The top ten recurring revenue metrics are in no particular order and the importance of each varies with the individual business and its goals. Each metric, however, is a solid indicator of a healthy (or unhealthy) recurring revenue business.

1. Top Recurring Revenue Metrics – Experts Weigh In

2. All Contents © Aria Systems 2015 2
TOP RECURRING REVENUE METRICS
More and more companies are turning to recurring
revenue models to grow the business and
increase customer satisfaction and retention.
47% of U.S. businesses have already
adopted or are considering adopting a recurring
revenue model. Have you?
Whether you’re thinking about recurring revenue
management or already testing the waters,
consider the following metrics.

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TOP RECURRING REVENUE METRICS #1
BRUCE CLEVELAND
General Partner,
InterWest Partners
Customer Retention Cost
DEFINITION:
Customer Retention Cost (CRC) includes
all expenses a company incurs in retaining and
cultivating its existing customers.
FORMULA:
Customer Success Team Cost
+ Renewals and Account Management Team Cost
+ Customer Engagement and Adoption
Systems and Programs
+ Professional Services and Training
+ Customer Marketing
“The CRC ratio must
become a key topic in
every board session. The
survival of the company
depends upon the
executive team
understanding and
managing this metric.”
= Customer Retention Cost

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TOP RECURRING REVENUE METRICS #2
LTV-to-CAC RATIO
DEFINITION:
Lifetime Value (LTV) predicts the net profit a company
will make from an entire customer relationship. Customer
Acquisition Cost (CAC) includes all costs spent to acquire
a customer. LTV-CAC is the ratio of the two.
FORMULA:
LTV-to-CAC Ratio = LTV / CAC
(ARPA*GM*CL)
Sum of all Sales & Marketing Expenses
No. of new Customers Added
ARPA = Average Revenue per Account
GM = Gross Margin
CL = Customer Life
Customer Life = 1 / Gross Dollar Churn
“LTV-to-CAC ratio is
better than CAC or
CAC Ratio because
what you pay for
something should be
a function of what it’s
worth. The general
rule of thumb is that
LTV-to-CAC should
be 3.0 or higher.”
SALIL DESHPANDE
Managing Director,
Bain Capital Ventures
( )

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TOP RECURRING REVENUE METRICS #3
Annual Recurring Revenue
DEFINITION:
Annual Recurring Revenue (ARR) is the
expected total yearly value of your
customers’ annual subscriptions.
FORMULA:
ARR = Σn
n = customer’s annual subscriptions
“ARR is the true north
because all roads
ultimately lead to
it, including:
new bookings,
renewals, adoption
(upsells/cross-sells),
customer satisfaction,
and retention.”
TOM DIBBLE
CEO,
Aria Systems

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TOP RECURRING REVENUE METRICS #4
Average Revenue Per Unit
DEFINITION:
Average Revenue per Unit (ARPU) is a
revenue calculation often used by
communications and networking companies
and other subscription-based services where
users pay varying fees depending on the type
of contract and usage.
FORMULA:
Total Revenue
ARPU =
# of Subscribers
“ARPU has always
been a key
benchmark in
communications and
other services
industries because it
provides insight into
which product lines
are profitable and
driving growth.”
TED BROOKBANK
Senior Vice President,
Advanced Technology Group

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TOP RECURRING REVENUE METRICS #5
Customer Lifetime Value
DEFINITION:
Customer Lifetime Value (CLV) is the measure
of profitable brand loyalty from all customers
showing the total revenue derived from a
customer over the course of the relationship.
FORMULA:
CLV = ((MT x AOA) AGM) ACR
MT = # of monthly transactions
AOA = average order amount
AGM = average gross margin
ACR = average customer retention (in months)
“Average CLV allows
a business to know
how much to spend
on customer
acquisition and
be profitable.”
BOB FEGHALI
Billing Industry Advisor

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TOP RECURRING REVENUE METRICS #6
Customer Net Profitability Value
DEFINITION:
Customer Net Profitability Value (CNPV) is the
amount of profit generated per customer
across the entire engagement lifetime.
FORMULA:
CNPV = Revenue – Customer Acquisition Costs
“CNPV provides a
better metric for
properly targeting a
company’s sales and
marketing efforts to
attract profitable
customers.”
JEFFREY KAPLAN
Consultant,
THINKstrategies

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TOP RECURRING REVENUE METRICS #7
Conversion Rates
DEFINITION:
Conversion rates include: the percentage of
unique website visitors who sign up for a plan
(free or paid) and the percentage of free trial
subscribers who upgrade to a paid plan.
FORMULA:
# of free trial plan subscriptions
# of unique visitors
# of unique visitors
# of upgrades from free trial to paid plans
# of free trial plan subscriptions
# of paid plan subscriptions
OR
OR
“Conversion rates
impact recurring
revenue by giving us
insights into consumer
behavior, the usability of
our website, and the
popularity of our various
product offerings.”
KARISHMA KARNIK
Sr. Program Manager,
HERE, a Nokia company

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TOP RECURRING REVENUE METRICS #8
Usage/Consumption Level Decile
DEFINITION:
Usage/consumption decile identifies which
customers use the services provided and
informs a company on how to create a
distribute targeted offerings.
FORMULA:
Calculate a Decile
Dk = Li +
Li = Lower limit of the decile class
N = Sum of the absolute frequency
= Absolute frequency lies below the decile class
= Absolute frequency
“Usage/consumption
level deciles provided
actionable insight into
whether the customers I
am losing, gaining, or
keeping use and value
the service I provide.”
BRENDAN O’BRIEN
Co-Founder,
Aria Systems
ai
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TOP RECURRING REVENUE METRICS #9
Retention and Churn Rates
DEFINITION:
Retention Rate: the percentage of
customers retained from period to period.
Churn Rate: the percentage of customers
lost from period to period.
FORMULA:
Retention Rate (%) =
Total Customers (start of period) – Customers Lost (period)
Total Customers (start of period)
Churn Rate (%) =
Customers Lost (period)
Total Customers (start of period)
“Customer
Retention/Churn
Rates are prime
indicators of your
business’s health.
Minimizing churn
is not just a
revenue protection
strategy, it’s a
revenue growth
strategy.”
BOB HARDEN
Principal,
The Harden Group

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TOP RECURRING REVENUE METRICS #10
Total Contract Value
DEFINITION:
Total Contract Value (TCV) is the
summation of the values of all contract
terms, inclusive of all revenue types and
length of term.
FORMULA:
TCV = (MRR x # of months) + any one time
revenue + any contracted services revenues
OR
TCV = (ARR x # of months) + any one time
revenue + any contracted services revenues
MRR = Monthly Recurring Revenue
ARR = Annual Recurring Revenue
“TCV is a key financial
indicator of a business
and a prerequisite for
undertaking proper
analysis and valuation
of a company.”
ANDREW DAILEY
Managing Director,
MGI Research

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MAXIMIZING RECURRING REVENUE SUCCESS
Measurements for Success
All metrics are not created equal.
While these metrics are valuable, the
key is leveraging the ones that are
most important to your role and your
ability to drive long-term recurring
revenue success in your business.
For further information on how you
can grow your recurring revenue
business, visit www.ariasystems.com.