This article was original published on Newion, Amsterdam-based venture capital firm, focused on early-stage investments in B2B software companies in North-West Europe.
To make strategic decisions, knowledge of future revenue growth and potential is required. Company executives can increase the quality of these estimations by deducting relevant insights from the historical recurring revenue. In this article, we bring two sets of KPIs forward that have a strong relationship with each other and can give crucial business insight.
Contracted Monthly Recurring Revenue vs Monthly Recurring Revenue
Not all customers are created and treated equally. You probably have some customers with ramp-up deals, temporary discounts, free of charge months and other causes that temporarily impact revenue. In this perspective, the CMRR or ACV (Contracted Monthly Recurring Revenue/Annual Contract Value) value is a great metric to make the future value of current revenue streams more insightful, since it removes any initial variations of the customer agreement. Let’s use an example you may be familiar with:
A customer signs a contract on the 15th of June, the contract starts on the 1st of July, but the customer also has 1 month free of charge – meaning revenue (MRR) comes in per August.
However, the booking will show CMRR already on the 15th of June because at that point you already have Committed revenue in an agreement with a customer. This gives a clear picture on the future MRR based on current contracts.
This of course is an example where is only +- 6 weeks of revenue delay. Implementing this metric in your strategic business planning can have a big impact, if deployed on all customers, with all different contract dynamics. CMRR looks at the total contracted value, so all things with a temporary stamp on it like a 20% first-year discount are reflected in MRR but not in CMRR. It almost feels like tampering with metrics, but it is contractually agreed so the revenue belongs to you, it’s simply not in the bank yet. Applying churn, contract constraints, and upsell potential to the multiyear CMRR values can show a more accurate future growth trajectory than when applied to MRR numbers. (If churn and upsell figures are stable and if upsell is calculated on contract value and not on current MRR levels).
We at Younium see a very big shift in companies reporting Contracted Monthly Recurring Revenue instead when applying for funding or even when they’re up for sale. If you have a multiplier on either ARR or ACV (the annual equivalent of CMRR) can be drastically different. However, if this gap is too big, it’s again good to look at the causes, there might also be issues in operations that can cause this gap, like temporary discounts due to slow onboarding, free of charge months because of issues in customer communication or simply giving too much discount and you need to review your pricing model. Using both Contracted and Received revenue is therefore crucial to have the full operational view of your revenue flow. This is also one of the main reasons why working with Subscription Management systems that can report revenue both on the recognized level and the booking level is crucial.
Customer Acquisition Cost (CAC) vs Annual Contract Value (ACV) - SaaS Magic Number
The second set of insights is the CAC vs ACV, also called the SaaS Magic Number. The SaaS Magic Number is aimed to give you insights when to invest in Sales and Marketing, when to wait or when it’s not the right time yet. It also tells you how efficient the current team is operating because it says something about both the effort and close rates.
It is calculated like this:
The rule of thumb is to steer the outcome based on this:
- <0,5 means not ready to invest in Sales and Marketing
- <0,75 Evaluate what can be done
- >0,75 Invest in Sales and Marketing!
Lower than 0.5 typically means that there is something wrong with your business model. Your pricing model can be too high or does not resonate with your Ideal Customer Profile. Can also be a high churn rate that’s causing this or your revenue does not align with the sales effort. More than enough reason to have a deeper look at least.
If it’s between this and <0,75 you’re on the right path with sales efficiency. However, this again needs a deeper look into why it’s not higher. Before investing in sales and marketing you need to understand what it is that doesn’t make it above 0,75. Typically these are the same reasons in our previous example.
If you are above 0,75 however, this should be a key indicator you are on the right path and need to start fueling your sales and marketing efforts with funding even more. You have then proven your product/market fit and have acceptable CAC payback periods and should use this to invest even further and grow even faster!
Book a meeting with one of our subscription experts and we will look at your case.