Daniel Druker, senior vice president, marketing and business development at Intacct Corp., suggests cloud and SaaS firms should take a page from subscription-based businesses such as cable TV and cell phone carriers. Recurring revenue and churn are among the important metrics for those companies. With some tweaking, those metrics can be applied to manage cloud companies said Druker, whose company provides cloud financial management and accounting applications. He recently published a blog post on “cloudonomics.”
Here’s a quick look at a few key metrics and how they apply in the cloud. By no coincidence, many of the metrics apply to managed services providers.
Monthly recurring revenue (MRR)Cloud and SaaS vendors, like the consumer-oriented businesses, may sell subscriptions on a month-to-month basis or as annual contracts. MRR represents the total value of a vendor’s recurring subscription revenue. Druker also pointed to committed monthly recurring revenue (CMRR), which reflects not only customers already in production but those who have signed up and are about to start.
Bessemer Venture Partners’ definition of CMRR calls for churn -- the MRR a company expects to lose due to departing customers -- to be subtracted from the monthly count. CMRR, according to Bessemer, offers “the most pure forward view of the ‘steady state’ revenue of the business.”
Customer ChurnChurn is a measure of customer stability based on renewal rates. For a healthy company, the renewal rate should be no lower than 90 percent, Druker noted.
“The businesses that acquire customers and lose them quickly will fail in the subscription-model business,” he said.
Churn may also be measured in terms of revenue -- if $ 1 million in business is up for renewal, how much of it will endure? Druker said the most successful cloud companies convert 100 percent of the revenue or greater (due to the sale of additional modules upon renewal, for example).
Churn can’t be applied to every aspect of a cloud business, however. In the public cloud, customers constantly spin up virtual machines and then leave -- a characteristic of development and test environments. In this case, a company can take a look at the average revenue across all clients on a month to month basis.
Randy Rowland, senior vice president of product development at Terremark Worldwide, said this approach helps determine whether the “platform [is] growing and consuming more resources and billing higher revenue.”
On the other hand, churn does apply to the enterprise cloud business, which involves a contract with a service level agreement for guaranteed resources, he noted.
Rowland, however, suggested it may be too early in the cloud business to know what the churn patterns will emerge. He said he believes the patterns will probably fall somewhere between those for colocation and managed hosting.
Customer Acquisition Cost (CAC) RatioDruker also cited the important of the CAC ratio, which gives companies a handle on the cost of signing up a client. Bessemer describes the CAC ratio as determining “how much of your sales and marketing investment is paid back within a year.”
A company with a 0.25 ratio means the break even point is four years out -- which could be a problem if your customers are bolting after two years.
ConclusionDruker said those metrics are entirely new for many companies, noting that their adoption is particularly difficult for businesses moving into the cloud from traditional on-premise software licensing. But it’s important to measure the right things when running on the cloud.
“The whole point of these metrics is to accurately gauge the health of a recurring revenue business,’’ he said.
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