1 00:00:00,290 --> 00:00:05,920 Before we introduce Churn and LTV, we need to cover the concept of recurring revenue. 2 00:00:05,920 --> 00:00:06,610 Churn and LTV, 3 00:00:06,610 --> 00:00:11,000 are most relevant to businesses with recurring revenue business models. 4 00:00:11,000 --> 00:00:13,800 For example, software as a service, or 5 00:00:13,800 --> 00:00:17,680 SaaS, is a recurring revenue business model. 6 00:00:17,680 --> 00:00:21,740 Most cable TV contracts are recurring revenue models as well. 7 00:00:21,740 --> 00:00:26,460 For businesses with recurring revenue models, they want to closely keep an eye 8 00:00:26,460 --> 00:00:31,070 on how much money they are receiving from their customers, every month or year. 9 00:00:31,070 --> 00:00:34,830 And, whether or not those customers continue to pay them each month or year. 10 00:00:35,930 --> 00:00:38,920 This is what the heart of this course is about. 11 00:00:38,920 --> 00:00:42,667 Unpacking the metrics that management will use to monitor that 12 00:00:42,667 --> 00:00:44,651 fundamental business dynamic. 13 00:00:46,119 --> 00:00:50,041 Let's talk about the terms MRR, ARR and ARPU. 14 00:00:50,041 --> 00:00:57,136 MRR is Monthly Recurring Revenue, and ARR is Annual Recurring Revenue. 15 00:00:57,136 --> 00:01:01,913 If we have monthly-based contracts, where our customers pay us month to month. 16 00:01:01,913 --> 00:01:05,132 And can choose not to pay us anymore month to month. 17 00:01:05,132 --> 00:01:09,818 Or change the amount they're paying us based on different usage levels. 18 00:01:09,818 --> 00:01:15,466 The revenue we get from that customer can be classified as MRR. 19 00:01:15,466 --> 00:01:22,110 At a high level, ARR is similar to MRR with one major and important difference. 20 00:01:22,110 --> 00:01:26,530 ARR is contractually locked in revenue for a specific term of time. 21 00:01:26,530 --> 00:01:30,080 And it has a term of at least one plus year. 22 00:01:30,080 --> 00:01:33,910 So, if our customer signs up for an annual contract and 23 00:01:33,910 --> 00:01:37,610 pays us on an annual basis, this would be known as ARR. 24 00:01:38,940 --> 00:01:42,421 To calculate our total MRR or ARR for a given period, 25 00:01:42,421 --> 00:01:46,535 we would sum up all the revenue from our different customers, 26 00:01:46,535 --> 00:01:50,429 based on the contractual dynamics with those customers. 27 00:01:50,429 --> 00:01:54,753 For example, let's say we sign on a business as a customer, and 28 00:01:54,753 --> 00:01:59,255 they sign a three year deal for a total value of $300,000. 29 00:01:59,255 --> 00:02:01,968 The ARR or Annual Recurring Revenue, 30 00:02:01,968 --> 00:02:05,870 associated with this contract is $100,000 or 31 00:02:05,870 --> 00:02:12,310 300,000 divided by the 3 year term, to get the annualized ARR number. 32 00:02:12,310 --> 00:02:16,990 Note, that you would typically not include things like implementation or 33 00:02:16,990 --> 00:02:19,747 set up fees in your MRR or ARR calculations. 34 00:02:19,747 --> 00:02:23,395 Because, they're not ongoing or recurring. 35 00:02:23,395 --> 00:02:26,607 Sometimes, you may have contractually recurring support costs, but 36 00:02:26,607 --> 00:02:28,310 that's different. 37 00:02:28,310 --> 00:02:33,750 Remember that, MRR and ARR are not GAAP defined terms. 38 00:02:33,750 --> 00:02:38,090 We're starting to touch on what are known as revenue recognition principles. 39 00:02:38,090 --> 00:02:42,550 This is an advanced topic that we're not going to cover in this course. 40 00:02:42,550 --> 00:02:45,880 In the teacher's notes, we've included some links to articles about 41 00:02:45,880 --> 00:02:49,710 revenue recognition, if you're interested in exploring this topic further. 42 00:02:49,710 --> 00:02:55,880 The third term I want to introduce at this time, is average revenue per user or ARPU. 43 00:02:56,880 --> 00:03:01,860 Remember how ARR and MRR are usually talked about in the context of 44 00:03:01,860 --> 00:03:07,610 total revenue, based on the contractual dynamics from different customer segments, 45 00:03:07,610 --> 00:03:10,370 as opposed to individual customers? 46 00:03:10,370 --> 00:03:16,000 ARPU looks at the average revenue per customer or user in that segment. 47 00:03:16,000 --> 00:03:20,783 Let's say, we had 100 customers on average over the course of the year. 48 00:03:20,783 --> 00:03:25,211 If we had $10 million in revenue, generated from that customer segment. 49 00:03:25,211 --> 00:03:29,229 In this example, our ARPU would be $100,000. 50 00:03:29,229 --> 00:03:31,197 When calculating ARPU, 51 00:03:31,197 --> 00:03:36,543 since it is an average based on revenue generated over a time frame. 52 00:03:36,543 --> 00:03:41,660 We need to look at the average number of users over that time frame as well. 53 00:03:41,660 --> 00:03:43,630 We wouldn't take our revenue for the year, and 54 00:03:43,630 --> 00:03:46,720 divide it by the users we had at the end of the year. 55 00:03:46,720 --> 00:03:50,210 We need to divide the revenue by the average number of users, 56 00:03:50,210 --> 00:03:51,905 over the time frame. 57 00:03:51,905 --> 00:03:57,110 ARPU can potentially be misleading if our customer base is fluctuating a lot, 58 00:03:57,110 --> 00:03:59,170 or if our time frame is too long. 59 00:04:00,220 --> 00:04:04,560 It could be a revealing exercise, for you to think about the services and 60 00:04:04,560 --> 00:04:08,520 subscriptions you have in your business or personal life. 61 00:04:08,520 --> 00:04:12,500 Are you generating ARR or MRR for the provider? 62 00:04:12,500 --> 00:04:16,360 For the monthly payment services, how does that translate into annual costs? 63 00:04:17,410 --> 00:04:20,650 Are you contractually locked in to any of these services, or 64 00:04:20,650 --> 00:04:23,920 can you cancel it any time without penalty. 65 00:04:23,920 --> 00:04:25,730 You may be surprised by what you find. 66 00:04:26,880 --> 00:04:28,720 Okay, back to the course. 67 00:04:28,720 --> 00:04:30,550 In the next video, we'll introduce Churn.