Blog 87: Delving deeper into product revenue metrics

In blog 34 we looked at product metrics that companies use. They can be broadly categorised into 7 buckets. Revenue being the first bucket. Let us further explore the first bucket, revenue.

Product revenue metrics:

Recurring revenue is income a business receives at regular intervals. For example, monthly recurring revenue (MRR) and annual recurring revenue (ARR). This revenue is income from ongoing subscriptions, usage, and number of seats. It must not consider one-time or non-regular revenue. Making, recurring revenue a reliable metric.

Monthly recurring revenue (MRR) vs. Annual recurring revenue (ARR):

MRR is regular income each month, while ARR is income over the course of a financial year. MRR helps us understand the shorter-term revenue trends, while ARR gives us an annualised view of recurring revenue.

MRR is beneficial for short-term analysis and assessing the immediate impact of marketing campaigns on revenue.

MRR is also valuable for day-to-day operational decisions, such as adjusting pricing or testing new features.

ARR is beneficial for long-term financial planning and forecasting. It also aids with strategic decisions such as scaling the business, setting budgets (blog 86: budget management), and allocating resources.

MRR = revenue from [active subscription plans + contracts + repeat purchases] in a month. Note: Exclude one-time or non-regular revenue.

Therefore, ARR = MRR x 12

There is a modified version that includes recurring revenue from expansions. Expansions such as feature upgrades or add-ons.

ARR = [total amount of all yearly recurring revenue + total amount of all recurring expansion revenue] - churned user revenue

Note: Churned user revenue is revenue lost due to customer churn. Positive experiences, strong customer engagement, and retention strategies will help stem customer churn.

What are recurring revenue sources?

1. Subscription-based recurring revenue is from customers who pay a regular fee to access a product. Customers pay this fee at set intervals e.g., monthly, quarterly, or annually. Product companies offer subscriptions on a tiered basis. Each tier is differentiated by the level of functionality, target audience, and scope of features offered. Netflix, Amazon Prime, Apple Music etc. are some examples of monthly subscription-based recurring revenue models.

2. Usage-based recurring revenue is from customers who pay based on their usage of a product over a specific period. By looking at historical usage data, companies can predict a customer's monthly usage. Cloud computing services provided by companies like Amazon Web Services (AWS), Microsoft Azure, or Google Cloud Platform use this recurring revenue model.

3. Seat-based recurring revenue is from customers who pay based on the number of user licenses, logins, or “seats” the customer needs. A SaaS company generally uses this seat-sharing model. For example, Salesforce, a customer relationship management (CRM) software, offers various pricing based on the number of user licenses purchased. Hence, the pricing plan can accommodate different business sizes and needs.

Note: Refer to blog 88 for more on different pricing models.

Increasing recurring revenue is vital. Upselling, cross-selling, and other user retention strategies help with increasing recurring revenue (refer blog 76: Grow revenue stream, upsell and cross-sell).

Jump to blog 100 to refer to the overall product management mind map.

Source:

https://amplitude.com/blog/mrr-vs-arr

I wish you the best for your journey. 😊