Modern Businesses, Modern Solutions - Metrics For Businesses In The Internet Era

Are you a new-age entrepreneur (or an employee in such a setup)? Does your business rely primarily on subscriptions / repeat purchases?

Have you felt that traditional business metrics, while useful, aren’t really helping you plan as well as you could due to a lack of clarity on measurements specific to doing business in 2022?

Then you already know that you should be reading ahead, as this piece might introduce you to metrics that have emerged as critical in an internet-driven business environment.

There’s a GAAP that needs to be bridged

With all due respect to GAAP, the all-encompassing and respected traditional accounting principles, due to their very nature of non-specificity, have not been able to throw up business metrics that help internet-based businesses achieve a succinct picture of success (or failure).

Given the emergence of new revenue streams, channels and transaction frequencies, there is a gap (pun intended) that needs to be bridged.

This is where new-age business metrics such as MRR, CAC, activation rate, churn rate etc. have emerged as nifty measurement metrics that help all stakeholders get a better understanding of how a traditional business is performing.

Sure, a lot of them are pretty granular in nature and seldom to be used in isolation. However, put together, these little lego brick metrics can create a dependable snapshot of business performance at intervals and viewpoints a lot more relevant to new-age businesses.

So let’s dive in and look at the new age metrics being used by successful internet based businesses today:

1.    Monthly Recurring Revenue:

A metric primarily used by subscription and SaaS-based businesses.

To calculate MRR for a given month, just take the total revenue from recurring subscriptions, divide it by number of active users and then multiply the result (average billed amount) by the total number of customers.

MRR = Average Revenue Per User x Total number of customers

The whole point of calculating MRR is to get an estimate of the revenue that your company expects to earn on a monthly basis (basis the repeated subscription earnings).

There are various kinds of MRRs:
•    New MRR (new customers)
•    Expansion MRR (upgrades)
•    Reactivation MRR (previous customers returning)
•    Contraction MRR (downgrades)
•    Churn MRR (cancellations)

Monitoring these enables a deeper analysis of how the business is performing beyond broad overview levels.
(We will get back into these variants in a later post.)

2.    Annual Recurring Revenue

MRR is normalised on a monthly basis, and ARR is normalised on an annual basis. That is the only real difference.
Another way to calculate ARR would be:
ARR = Total Annual Revenue - Non-Recurring Revenue

However, ARR is used to make longer-term analyses and hence corrections and major overhauls in business operations. ARR is one of the primary tools to ascertain the success (or failure) of a business model and for forecasting growth (future potential) for a business.

It is then obvious that ARR is one of the key elements used for deriving valuation and for raising capital.
Just like MRR, there are multiple variants of ARR the business managers monitor:

•    New subscriber ARR
•    Renewal ARR
•    Upgrade ARR
•    Downgrade ARR
•    Churn ARR

Just like with MRR, a bare ARR number hardly describes the true performance level of a business.

For example, a company might have a large net positive ARR, but all of that comes from new subscribers owing to ridiculously high CAC (customer acquisition cost), while churn MRR has a steeper graph than renewal ARR.

Looks great from a singular consolidated ARR figure but clearly points to a failing business model.
(We will get back into these variants in a later post.)

3.    Average Revenue Per Account / User

ARPA or ARPU (user), as the name suggests, is the number arrived at by dividing total revenue by the number of subscribers.

It’s a figure that is used widely for comparative analysis of growth (or de-growth) in revenue earned from a customer unit. Thereby making it a great tool for forecasting & planning.

Say your firm earned $200000 in 2021 when you had 1000 subscribers (ARPA = $200), and in 2022 the total revenue was $300000 with 1200 subscribers (ARPA = $250). It simply means that your revenue earned per customer unit grew, and broadly speaking, is great news that you can use to get higher valuation / better funding, as well as take other expansion-related business calls. Also, it is used to compare the performance of a firm versus others in the same industry.

If both you and your competitor sell copyrighted music and you have a revenue of $5 per subscriber vs $4.35 / subscriber of your competitor (with nearly the same total subscriber numbers), you know that you’ve been doing something right.
And to find out what you’ve been doing right, you can dive into other metrics like ARR and MRR.

4.    Total Contract Value

TCV is a super simple metric to calculate.

Just take MRR, multiply it by the number of months the signed contract is for, and then add all one-time fees applicable.

All said, it is the entirety of revenue that you will generate from a particular customer.

For a subscription-based business it’s useful to calculate TCV because, as we’re all aware, not all customers are built the same.

There are two customers who might buy similar length contracts, but one of them might buy a lot more of the one-time add-ons and hence is more valuable to your business.

An example here would be customers buying a domain and hosting services. A lot of digital marketing companies might buy the same plans as boutiques run by housewives, but the latter might also buy website-building services that you offer.

As a service provider, it would then make a lot of sense for you to spend more effort on marketing and selling to business owners who’d need help with technical setup and website design to increase unit revenue/profitability.

5.    Lifetime Value

LTV is the estimated average revenue that a customer will generate through the entire period of them being associated with you.
One of the simplest ways to calculate LTV:
LTV = MRR / Churn

Say your MRR is $20 and your churn rate is 10% then the LTV for a new customer will be (20/0.10) i.e. $200 and the expected customer lifetime is 10 months.

LTV is a heavily used metric by SaaS and non-SaaS businesses alike (although the ways of measurement might differ slightly) for revenue forecasting, customer segment valuation, aligning it with CAC (customer acquisition cost) for measures of (eventual) profitability and product/service traction (overall and with various cohorts)

Clearly, LTV is not only useful as a top-line metric but also as one that assists in creating better subscription bundles as well as optimising marketing strategies/budgets

6.    Customer Acquisition Cost

A holy grail metric. How much did it cost you to acquire one unique customer? Calculation?
CAC = Total Marketing Costs (acquisition related) / Total Customers Acquired

As a thumb rule, CAC should always be lower than LTV. Obviously, it makes scant sense to spend more on getting someone into your store than them spending once they’re there, right?

Exceptions do exist (and you’d be forgiven to think they’re the rule sometimes) where a new business needs to get to enough people and onboard them to reach a certain scale/stickiness so to allow profitability.

However, there’s a lot of ink that has been spilt on that account, and I wouldn’t be adding anything useful by addressing that subject here.

7.    Concentration Risk

Also referred to as customer concentration is a percentage of how much of your revenue comes from your biggest customer.

Concentration risk = Revenue from the highest paying customer / Total revenue.

The whole point of this metric is to understand what risk you’d face if your biggest customer left your folds.

In a setup where the volume of customers is high and stickiness low, it makes sense to have low concentration risk. However, in certain businesses which are niche in nature and have a low market size and or high stickiness due to entrenchment or other such factors, a high percentage of concentration risk can be acceptable.

Needless to say, CAC numbers should always run lower than customer concentration, and pricing buffers should always be planned to keep concentration risk in view.

8.    Daily Active Users

DAU is the number of users that are active on your app or website every day.
User = visitor to a website/anyone who has downloaded an app

Active user = any visitor/app user who performs an action defined by the company to deem him/her “active.”

So if you’re a news website and you’ve decided that anyone who clicks on and scrolls to the end of one news article will be considered an active user, all users who have performed that action on a particular day will qualify to be counted as DAUs for that day.

This metric is one of the simplest ways to tell whether your product or service is being received well by the intended customers.
Another good example would be meta / Facebook which defines DAU as:

“A registered and logged-in Facebook user who visited Facebook through our website or a mobile device or used our Messenger application (and is also a registered Facebook user) on a given day.”

9.    Monthly Active Users:

MAU is exactly the same as DAU, except the calculation is for a month instead of a day.

MAUs (much like DAUs) depend on the definition of an “active user” and aren’t specific to an industry. So they can be kind of misleading when used to measure a product’s success.

DAUs are, when well-defined, a better measure of the quality of customer interaction than MAUs, but nevertheless, well-defined MAUs definitely help paint a holistic picture of the breadth of a business’s footprint.

10.    Monthly Churn Rate

Percentage of customers you lost over the period of a month.

Monthly Churn Rate = (Number of customers lost in a month / Total number of customers at the start of that month) * 100

Clearly, the higher your churn rate, the worse you’re performing (unless you are the government and your site registers unemployment claims).

Churn rate obviously is a critical metric that helps you keep an eye out for lack of customer stickiness and take corrective action.

It is relatively easier to spend money and lure an individual to perform a baseline action so they can be categorised as customers and thus inflate “user” numbers (remember MAU?). However, it is an entirely different case scenario to get them hooked on to your offering and use it regularly.

Heavy churn rates are always a clear giveaway when entry barriers are low and retention tactics poor. Making calculating churn (monthly or otherwise) a must for robust analysis of business performance.

Author: Agam Chaudhary has been helping eCommerce businesses grow revenues and profits since 2007. He specializes in ROAS and CRO assignments. Recently, he curated a marketing algorithm for the new age businesses, which enables the brands to enhance the experience of the customers and build contributing communities.

He can be reached at hello@agamchaudhary.com | WWW.TWO99ECOMMERCE.COM