“If you understand these metrics and if you track them yourself, it’s going to help you both to focus on your most valuable customers to hit your goals.” – Robbie Kellman Baxter in today’s Tip 757
How about you? Do you understand these key metrics in the SaaS world?
Join the conversation below and learn more about Robbie!
Robbie Kellman Baxter on LinkedIn
The Membership Economy
The Forever Transaction
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Scott Ingram: You’re listening to the Daily Sales Tips podcast and I’m your host, Scott Ingram. Today’s tip comes from Robbie Kellman Baxter. Robbie is a consultant, speaker, and the author of two bestselling books: The Membership Economy and The Forever Transaction, and hosts the podcast Subscription Stories. Robbie has more than 20 years of experience providing strategic business advice to major organizations, including Netflix, Microsoft, and The Wall Street Journal as well as dozens of venture-backed private SaaS businesses. Here she is:
Robbie Kellman Baxter: The metrics used to measure the health of an anything as a service business are quite different from those of a more episodic or transactional business. That quarterly revenue number just isn’t as important as it used to be. What matters most are the underlying metrics that make up that bigger number? How much is the new revenue and how much is recurring revenue? How many customers are expanding their spend? How many are contracting their spend?
Remember in the membership economy, not all revenue is created equal. Some of the metrics that will be most important to your boss and therefore to you include the following, buckle up there’s quite a few. The first one is Average Revenue Per User, ARPU, or Average Revenue Per Account, ARPA. And that’s the total monthly recurring revenue divided by the total number of users or a total number of accounts. Something similar is Annual Recurring Revenue or Monthly Recurring Revenue, that’s ARR or MRR. And that’s the total amount of revenue coming in each period divided by the number of active customers, both new and existing.
Customer Acquisition Cost or CAC, looks at how much you’re spending to win each new customer. Customer Lifetime Value is probably my favorite of all the metrics. And it’s the revenue that an individual customer brings in directly. And sometimes indirectly between the time you acquire them and the time they cancel their subscription. This includes the value of the entire account, not just the initial foothold of that first deal.
Expected customer lifetime value is a way that organizations can try to predict lookalike behavior based on past customer behavior by cohort, it’s about seeing what would you predict the future value of the subscriber to be based on past customer behavior. And this is how anything is a service businesses forecast, what they think their revenues going to be into the future.
CLV over CAC ratio is important because it tells you if the investment you’re making that is your spend to acquire the customer is justified by the money you’re making from that customer, the customer lifetime value. You probably familiar with the NPS score, Net Promoter System score. We answers the question on a scale of 0 to 10. How likely is it that you would recommend this product or service to your colleagues or business associates? Customers that give you a six or below are detractors those with a score of seven or eight are called passives. And those with a nine or 10 are promoters. The net promoter score is the percentage of promoters. You have minus the percentage of detractors you have. And this is a really good way of telling an advance how happy your customers are with you. That is how likely they are heart to stay, expand, or cancel the relationship. And it’s also a good way to see if your customers are likely to be making referrals for you, which of course is the Holy Grail of sales. It’s so much easier to close a referred deal than it is to go out and cold, call your way into new business.
And finally churn is the number of subscribers that cancel in a period divided by the number of subscribers at the start of the period. This is a way of measuring whether your business is growing because of all the new customers you’re bringing in, or whether it’s growing because of the customers who are staying. And for many, many organizations is the single most important metric.
If you understand these metrics and if you track them yourself, it’s going to help you both to focus on your most valuable customers to hit your goals. And at the same time, it’s probably going to result in you having to work less hard while making your customers much happier.
Scott Ingram: We’ve got all kinds of stuff for you from Robbie, including a copy of an excerpt of her new book The Forever Transaction as well as links to her LinkedIn profile and her podcast at DailySales.Tips/757.
Once you’ve checked that out. Be sure to come back tomorrow for another great sales tip. Thanks for listening!