Recurring Revenue4:31 with Michael Watson
We introduce the topic of recurring revenue, MRR, ARR and ARPU.
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
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