Source | LinkedIn : By Elizabeth Kraus
I have previously covered:
- How to ask and answer the question: “How much capital has your company raised to date?”
- The definition and formula for computing startup Monthly Recurring Revenue (MRR)
- How to measure customer retention and compute churn
- How to calculate your company’s repurchase rate
This is the final post in the definitive guide to startup KPI’s.
As an entrepreneur and angel investor, I’ve learned that there are certain financial terms and metrics that investors and entrepreneurs are expected to know. I’ve written previously about the startup metrics every entrepreneur should know by heart, but I’ve learned that many people are unsure of how to actually calculate these metrics. Many entrepreneurs and investors are not natural-born mathletes, and they don’t remember every detail from college accounting classes. Like myself, many are scared to admit that. Candidly, I went years without fully understanding how to calculate some of the metrics that “everyone” seemed to know. This post is intended to ensure that you won’t be in that situation.
The following are a few of the most commonly used startup metrics. It’s important to note that most of these terms are not official accounting terms. As such, there isn’t an official standard of how to calculate them. I’ve compiled this guide based on my experience working with thousands of entrepreneurs and angel investors. I’ve also received help from Ascent CFO Solutions.
MRR is an acronym for Monthly Recurring Revenue. MRR is income that a company can reliably anticipate every 30 days. Revenue from one-time purchases billed at the time of purchase is not included in MRR. MRR is only applicable to companies that provide services to their customers through an ongoing contractual relationship. This includes SaaS (Software as a Service) companies and any other subscription-based services, including gym memberships and box-of-the-month clubs. This also includes service providers offering multi-month retainers such as marketing, law and accounting firms.
Monthly Recurring Revenue can be calculated by using the consistent monthly revenue generated by each customer or by multiplying the total number of paying customers by the average amount all of those customers are paying each month (known as Average Revenue per User, or ARPU). Read my previous post, MRR – The Definition and Formula for Monthly Recurring Revenue, for a more detailed explanation.
2) Repurchase Rate
Repurchase Rate measures customer loyalty and is most commonly used in businesses that do not have a subscription-based business model, such as e-commerce and consumer products companies. Repurchase Rate typically is calculated by dividing the number of customers who made at least two purchases within a period by the total number of customers within that same period. However, it is sometimes calculated with a slightly more complicated formula that considers the number of times each customer makes a repeat purchase. For this Repurchase Rate formula and for more details, read my previous post: Repurchase Rate: The MRR of Non-SaaS Startups.
3) Churn Rate
Churn Rate is a metric for measuring retention, most frequently referring to customer retention. As a customer retention metric it is like MRR in that it is only applicable to companies that provide services to their customers through an ongoing contractual relationship. There are two different types of customer-related churn: Customer Churn and Revenue Churn. For further details, read my previous post: Churn: The Churn Rate Formula and Definition.