Heads up! To view this whole video, sign in with your Courses account or enroll in your free 7-day trial. Sign In Enroll
Preview
Start a free Courses trial
to watch this video
We introduce the topic of recurring revenue, MRR, ARR and ARPU.
Additional Resources on Revenue Recognition
Related Discussions
Have questions about this video? Start a discussion with the community and Treehouse staff.
Sign upRelated Discussions
Have questions about this video? Start a discussion with the community and Treehouse staff.
Sign up
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.
0:46
MRR is Monthly Recurring Revenue,
and ARR is Annual Recurring Revenue.
0:50
If we have monthly-based contracts,
where our customers pay us month to month.
0:57
And can choose not to pay
us anymore month to month.
1:01
Or change the amount they're paying
us based on different usage levels.
1:05
The revenue we get from that
customer can be classified as MRR.
1:09
At a high level, ARR is similar to MRR
with one major and important difference.
1:15
ARR is contractually locked in revenue for
a specific term of time.
1:22
And it has a term of at
least one plus year.
1:26
So, if our customer signs up for
an annual contract and
1:30
pays us on an annual basis,
this would be known as ARR.
1:33
To calculate our total MRR or
ARR for a given period,
1:38
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
1:50
they sign a three year deal for
a total value of $300,000.
1:54
The ARR or Annual Recurring Revenue,
1:59
associated with this
contract is $100,000 or
2:01
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.
2:16
Because, they're not ongoing or recurring.
2:19
Sometimes, you may have contractually
recurring support costs, but
2:23
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.
2:33
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.
2:49
Remember how ARR and MRR are usually
talked about in the context of
2:56
total revenue, based on the contractual
dynamics from different customer segments,
3:01
as opposed to individual customers?
3:07
ARPU looks at the average revenue per
customer or user in that segment.
3:10
Let's say, we had 100 customers on
average over the course of the year.
3:16
If we had $10 million in revenue,
generated from that customer segment.
3:20
In this example,
our ARPU would be $100,000.
3:25
When calculating ARPU,
3:29
since it is an average based on
revenue generated over a time frame.
3:31
We need to look at the average number
of users over that time frame as well.
3:36
We wouldn't take our revenue for
the year, and
3:41
divide it by the users we
had at the end of the year.
3:43
We need to divide the revenue
by the average number of users,
3:46
over the time frame.
3:50
ARPU can potentially be misleading if
our customer base is fluctuating a lot,
3:51
or if our time frame is too long.
3:57
It could be a revealing exercise, for
you to think about the services and
4:00
subscriptions you have in your business or
personal life.
4:04
Are you generating ARR or
MRR for the provider?
4:08
For the monthly payment services,
how does that translate into annual costs?
4:12
Are you contractually locked in
to any of these services, or
4:17
can you cancel it any
time without penalty.
4:20
You may be surprised by what you find.
4:23
Okay, back to the course.
4:26
In the next video, we'll introduce Churn.
4:28
You need to sign up for Treehouse in order to download course files.
Sign upYou need to sign up for Treehouse in order to set up Workspace
Sign up