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We introduce the topic of recurring revenue, MRR, ARR and ARPU.
Additional Resources on Revenue Recognition
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Before we introduce Churn and LTV, we need
to cover the concept of recurring revenue.
0:00
Churn and LTV,
0:05
are most relevant to businesses with
recurring revenue business models.
0:06
For example, software as a service, or
0:11
SaaS, is a recurring
revenue business model.
0:13
Most cable TV contracts are recurring
revenue models as well.
0:17
For businesses with recurring revenue
models, they want to closely keep an eye
0:21
on how much money they are receiving from
their customers, every month or year.
0:26
And, whether or not those customers
continue to pay them each month or year.
0:31
This is what the heart
of this course is about.
0:35
Unpacking the metrics that
management will use to monitor that
0:38
fundamental business dynamic.
0:42
Let's talk about the terms MRR,
ARR and ARPU.
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MRR is Monthly Recurring Revenue,
and ARR is Annual Recurring Revenue.
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If we have monthly-based contracts,
where our customers pay us month to month.
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And can choose not to pay
us anymore month to month.
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Or change the amount they're paying
us based on different usage levels.
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The revenue we get from that
customer can be classified as MRR.
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At a high level, ARR is similar to MRR
with one major and important difference.
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ARR is contractually locked in revenue for
a specific term of time.
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And it has a term of at
least one plus year.
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So, if our customer signs up for
an annual contract and
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pays us on an annual basis,
this would be known as ARR.
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To calculate our total MRR or
ARR for a given period,
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we would sum up all the revenue
from our different customers,
1:42
based on the contractual
dynamics with those customers.
1:46
For example, let's say we sign
on a business as a customer, and
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they sign a three year deal for
a total value of $300,000.
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The ARR or Annual Recurring Revenue,
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associated with this
contract is $100,000 or
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300,000 divided by the 3 year term,
to get the annualized ARR number.
2:05
Note, that you would typically not
include things like implementation or
2:12
set up fees in your MRR or
ARR calculations.
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Because, they're not ongoing or recurring.
2:19
Sometimes, you may have contractually
recurring support costs, but
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that's different.
2:26
Remember that, MRR and
ARR are not GAAP defined terms.
2:28
We're starting to touch on what are known
as revenue recognition principles.
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This is an advanced topic that we're
not going to cover in this course.
2:38
In the teacher's notes, we've
included some links to articles about
2:42
revenue recognition, if you're interested
in exploring this topic further.
2:45
The third term I want to introduce at this
time, is average revenue per user or ARPU.
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Remember how ARR and MRR are usually
talked about in the context of
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total revenue, based on the contractual
dynamics from different customer segments,
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as opposed to individual customers?
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ARPU looks at the average revenue per
customer or user in that segment.
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Let's say, we had 100 customers on
average over the course of the year.
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If we had $10 million in revenue,
generated from that customer segment.
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In this example,
our ARPU would be $100,000.
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When calculating ARPU,
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since it is an average based on
revenue generated over a time frame.
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We need to look at the average number
of users over that time frame as well.
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We wouldn't take our revenue for
the year, and
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divide it by the users we
had at the end of the year.
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We need to divide the revenue
by the average number of users,
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over the time frame.
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ARPU can potentially be misleading if
our customer base is fluctuating a lot,
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or if our time frame is too long.
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It could be a revealing exercise, for
you to think about the services and
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subscriptions you have in your business or
personal life.
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Are you generating ARR or
MRR for the provider?
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For the monthly payment services,
how does that translate into annual costs?
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Are you contractually locked in
to any of these services, or
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can you cancel it any
time without penalty.
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You may be surprised by what you find.
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Okay, back to the course.
4:26
In the next video, we'll introduce Churn.
4:28
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