General Background

Recurring revenue businesses, like SaaS or app subscription models, are different because the revenue for the service comes over an extended period (the customer lifetime). If customers are happy with the product or service, they remain customers longer, and the profit that can be generated by them increases considerably. On the other hand, if customers are dissatisfied, they churn quickly, and the business is likely to lose money on the customer acquisition investment costs. This creates a fundamentally different dynamic in comparison to a traditional (software) business.

Recurring revenue businesses have to fulfill three goals:

1. Acquiring customers,

2. Keeping customers (to maximize the lifetime value),

3. Monetizing customers (via cross-sell/upsell).

Because of the importance of customer retention, it is advisable to track and focus on the various operating and customer metrics that help analyze and understand retention and churn. In addition, you should track the financial metrics that help understand, if your recurring revenue business model is financially viable.

Important metrics include:

•Recurring revenues,

•Revenue per customer,

•Cost of Revenue (Cost of Goods (COGS), Cost of Services),

•Subscriber numbers (total #, net new and churned customers),

•Contract value per customer (TCV),

•Customer lifetime value (CLTV or CLV),

•Customer acquisition costs (CAC or COCA),

•Monthly gross margin per customer etc.

All these important metrics and additional financial KPIs are included in Excel-Financial-Model (Digital Economy). While most models lack any such metrics, those that do typically only calculate the CLTV at a high level across all offerings and customers, which is not particularly useful. What you need to see as an entrepreneur (and especially as an investor) are the specific CLTVs for each offering to be able to pressure test the assumptions made.

 

Definitions: The Devil is in the Details

Excel-Financial-Model accurately calculates all sales, marketing, and account management expenses from lead generation expenses, to sales commissions expenses, to account management expenses for each product/service (= offering), along with all other Cost of Sales (COGS, Direct Labor etc.). The model also picks up your assumed allocation of other general sales and marketing expenses. All these calculations and results are clearly shown by offering on the "Sales Summ" sheet.

However, most metrics are not specifically defined by GAAP or IFRS, so you can adapt them to your particular business case. Before analyzing, comparing and using the metrics included in Excel-Financial-Model, make sure that you fully understand the definitions used for their calculation as well as the limits of their informational value.

Especially during the start-up phase of a company with a recurring revenue business model (low customer numbers and sales volumes), the relevance and meaningfulness of many KPIs is limited (For example, when starting with a yearly subscription model, by definition, there will be no churn within the first 12 months).