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The last section we’re going to look at is revenue. Revenue is a crucial component of a profitable business and for an early stage startup, we’re going to be looking at three important metrics : (1) monthly recurring revenue, (2) churn and (3) customer lifetime value.
Definitions
 Monthly Recurring Revenue  The amount of subscription revenue owed by a customer over a certain time period.
 Churn Rate  The rate at which customers leave or stop using your product or service in a certain time period.
 Lifetime Value  The value of a customer over their lifetime with your product or service.

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For the final section of the funnel, we have revenue.

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Let's revisit our funnel.

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We have get, keep, and grow customers.

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Revenue, which is the final thing in our grow customers, it is not really the last thing.

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While it is certainly dependent on getting, keeping, and growing our customers,

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this funnel really loops back once you get to revenue,

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and starts over with revenue funding or next set of actions.

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Since revenue is so crucial to every aspect of your company,

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keeping an eye on it is very important.

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Revenue metrics for a new company is very different

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from what an established company looks at though.

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So if you were to open an accounting book, and take a peek at revenue

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or profitability metrics, it won't really make sense to your start up.

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For Web start up, I'm going to focus on 3 main metrics:

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Monthly recurring revenue, churn rate, and the lifetime value.

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First, you should always have your monthly recurring revenue,

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or MRR, front and center on your dashboard.

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Your MRR is the amount of subscription revenue owed by a

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customer over a certain time period.

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If that's hard to understand, think of it as a portion of revenue

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that you have some reasonable guarantee that will continue month after month.

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MRR is important because it is an indicator of continued business.

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It gives you a rough idea of the revenue you will be bringing in over the next few months.

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Our second metric is churn.

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Churn is attrition and occurs when a customer leaves your business and stops being a customer.

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The churn rate, therefore, is the rate at which you are losing customers.

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It is quite simple to calculate churn.

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Divide the number of customers who cancelled by the total number of customers.

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Identifying the number of people who cancel shouldn't be very difficult either.

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You can set up your system to notify you if someone

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cancels their account or stops payment.

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The hard part is keeping your churn rate low.

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Let's look at a simple example to see why the churn rate

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makes a huge difference for your company.

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Let's say that right now, every 2 months, we increase our

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customer base by 5,000 users.

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We charge $50.00 per member for our Web app. ?[crescendo]?

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So our monthly recurring revenue graph looks somewhat like this.

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Let's assume a very modest trend rate of 2.5% monthly.

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This means that every month we lose 2.5% of our customer base.

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If we calculate the loss in revenue, the new MRR graph drops down to this.

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As you can see, churn isn't that much of a factor when you have a few customers.

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But even at a very low rate of 2.5%, with 20,000 customers,

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we are losing 1,000 customers a month,

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which amounts to $50,000 of revenue lost a month.

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That means that to keep revenue constant

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we need to be acquiring at least 1,000 customers a month.

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And 2.5% churn is quite low.

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If we did a poor job retaining or customers and churn increased to 10%,

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we would be losing up to $100,000 a month.

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So while the percentage of customers leaving might not seem that big,

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churn means revenue out the window.

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It is very important to keep churn as low as possible.

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The final revenue metric, that is a very important to start ups, is lifetime value.

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Lifetime value of a customer is exactly what it means.

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The value of a customer over their lifetime with your product or service.

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There are many ways to calculate lifetime value,

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and your calculations will get better as you accumulate more data

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and understand your customers' behaviors more.

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But a simple way to start calculating the lifetime value

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is to multiply average revenue per user, or ARPU,

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by the average length of a customer relationship.

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To get average revenue per user, you take your total revenue

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and divide it by the total number of paying customers that you have.

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Say total revenue is $25,000 and you have 1,000 paying customers,

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average revenue per user works out to be $25.00.

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Every month, 20% of your customers leave.

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So churn is 20%.

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This means the average length of the relationship is 5 months.

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This number is obtained by calculating the inverse of churn.

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1 divided by 20% or 0.2 is 5.

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And since the churn period is measured in months,

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the average relationship is 5 months.

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The lifetime value, therefore, is $25.00 times 1 divided by 0.2 or $125.

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This means that a given customer will bring in $125

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for as long as they use our product or service.

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The reason we measure lifetime value is directly related to an acquisition metric.

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If you remember earlier, we calculated the cost per acquisition of a customer.

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When we monitor lifetime value, we compare it to the cost per acquisition.

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For a company to be profitable, the lifetime value must be

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greater than the cost per acquisition, otherwise we're just

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paying more to bring in a customer than they are

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are giving us in revenue, which makes no sense.

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If your lifetime value is lower that your acquisition costs,

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then you need to improve other metrics.

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For example, if you would use churnthat is if your customers stay longer

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you can increase their lifetime value.

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So there you have it, for revenue monitor your monthly recurring revenue,

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churn, and lifetime value, and you'll be on your way.

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Keeping an eye on your metrics is very important.

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And even though I've spoken about each metric in relation to its category,

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whether it is acquisition, referral, or revenue, they're all related to one another.

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So compare them to each other and understand how they're connected.

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If you get a grasp on these metrics, you'll be on your way to sustain profitability.
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