In addition to the CMRR, there are a few other key metrics that SaaS companies need to monitor on a monthly basis:
So which company is more interesting? How does a VC decide which of these to invest in? Contrary to popular opinion, it is (a little) more scientific than a blindfolded dart-throwing contest.
The next logical metric to examine is Gross New CMRR per Month, or New Customer CMRR. Since each month can be viewed as a new customer cohort (upsells are excluded), this exercise tells you the size of each new cohort you’re adding (in $). Great, so let’s compare ABC and XYZ on this:
Now which company is more interesting? Uh, well, clearly ABC right? I mean, that growth though! ABC has grown the new cohort size by 2.4x in 2 years, from $10k to $24k. ABC really knows how to scale its go-to-market! Meanwhile, look at boring old XYZ. They’ve been adding $10k of new CMRR every month for two years. Womp womp. No thanks XYZ.
But wait a second…these two charts are comparing the same two companies at the same point in time. How can they be identical on one chart, and so different on the other? Since we are indeed looking at CMRR, there’s no implementation lag.
Solving for end-of-month CMRR is a pretty simple arithmetic:
End-of-Month CMRR = Beginning-of-month CMRR + New Customer CMRR + Upsell CMRR – Downgrade CMRR – Churned CMRR
We can see that ABC is adding plenty of new CMRR each month. We can conclude that the company has a churn issue of some sort. Whether full-on cancellations or downgrades, it doesn’t matter. We can intuit that Company ABC is bleeding CMRR dollars somewhere. More on their specific retention trend in a second.
Net Dollar Retention and the Leaky Bucket Issue
What’s the best way to measure churn and benchmark against other SaaS companies? The industry standard benchmark is quickly becoming “net dollar retention.” If I acquire $1 of CMRR today, what is that $1 worth over time? The true best of breed companies today are seeing that $1 grow over time, becoming $1.10 or $1.20 or much more. This phenomenon is called “net negative churn.”
To some folks (read: VCs and serial SaaS execs), I’m sure this seems elementary. If that’s the case feel free to stop reading. These are not brand new revelations, and I’m not the Christopher Columbus of net negative churn. I’m writing this because I saw a number of real businesses in 2014 that were exploding in CMRR, but on deeper inspection had major net dollar retention issues. These companies were quickly getting to $600-800k CMRR, growing well over 100% year-over-year (and profitably too!). But on the retention side, $1 was shrinking to $0.40-$0.50 as early as Month 12. The founders of said companies were overly focused on total CMRR growth, while paying much less attention (if any) to cohort-based dollar retention.
Some people call this a “leaky bucket issue.” You see this on display in the ABC vs. XYZ comparison. If you examine ABC in isolation, you may be able to rationalize the leaky bucket. After all, they’ve grown CMRR to $264k from a standing start two years ago. And these guys are so good at scaling go-to-market! The “scaling go-to-market” argument is even easier to justify when there is a good CAC ratio, which is often driven by the kind of word-of-mouth virality that signals strong product-market fit.
But when you do a side-by-side comparison and switch out your rose-colored glasses, you realize ABC has had to grow their customer acquisition by 2.4x just to keep up with XYZ, who has apparently been on autopilot.
Alright enough with the lead-in editorial, let’s look at the retention curves for ABC & XYZ side-by-side. The equation here measures CMRR in Month X as a % of CMRR in Month 1. It’s measured on a cohort basis. The denominator stays fixed, which allows you to isolate the operational trend.
Wow, this is dramatic. It becomes clear why ABC has had to ramp its go-to-market so aggressively to keep in step with XYZ. ABC definitely has a leaky bucket issue — CMRR is seeing a rapid decline to 60% of its initial value by Month 12, and then slows toward an asymptote at 45% by Month 24. Our friends at XYZ on the other hand see net negative churn, growing CMRR to 120% of initial value by Month 24.
Now what happens if we assume XYZ is able to scale its go-to-market as ABC has? This would give us a true apples-to-apples comparison.
As you would expect, we see XYZ pulling away from ABC (whose linear CMRR growth doesn’t look so hot anymore). To be precise, XYZ is now ~58% bigger than ABC ($416k CMRR vs. $264k CMRR), with the front-end growth (and ostensibly the same go-to-market investment).
What’s perhaps more pertinent is that XYZ would most certainly get funded at a premium price, while ABC would likely have to resort to an inside round from existing investors. That’s not an oversimplification — I see companies like XYZ get $10-15M rounds at market-topping valuations. I honestly don’t think I’ve ever seen anything like that for a company like ABC.
Key Takeaways
Here are the key takeaways from this study:
- Improving retention gives you much more leverage on the go-to-market front (you’re fighting against a leaky bucket)
- The 1-2 punch of a growing front-end and a healthy back-end is the magic formula for exponential growth and lots of VC love.
Excel Spreadsheet Template
Click here for a spreadsheet you can use to calculate your own CMRR growth and Net Dollar Retention: Download Now - https://bit.ly/3wkrwO1
What is Customer Renewal Rate?
Customer renewal rate, also known as customer retention rate or renewal rate, is the percentage rate at which a company’s customers extend their relationships with the company (such as a subscription or membership). It is an important indicator of a company’s growth prospects. This metric is a critical measure of a company’s ability to generate long-term value for its customers.
Generally, a renewal rate above 80% is considered to be very favorable and indicates that a company is effective with its customer retention efforts. Every company aims to maximize its customer retention rate (bring it closer to 100%).
How to Calculate Customer Renewal Rate?
There are many ways to calculate customer renewal rate. Depending on its operations and goals, a company enjoys flexibility in calculating the metric. Nevertheless, there are two commonly used methods of calculation: count of customers and revenue methods.
1. Count of Customer Method
A straightforward and easy method of estimating customer renewal rate is the count of customer method. It is the ratio of the number of customers who renewed their contracts in a given time period to the total number of customers who could potentially have renewed their contracts during the period.
Mathematically, the count of customer method can be expressed using the following formula:
The count of customer method is most suitable for companies with a homogeneous customer base. These are companies whose customers all pay an equal amount of money for its product or service, or the variation is relatively small. However, if the customer base of a company is more varied, this method can provide misleading results about customer retention.
2. Revenue Method
Alternatively, customer renewal rate can be calculated as the ratio between the actual renewal value in revenues and the potential renewal value. In other words, the revenue method calculates the value of contracts rather than the number of customers.
The revenue method uses the following formula:
Unlike the first method, the second approach is more suitable for companies with a diverse customer base. This means that some of the company’s customers have small contracts while other customers have extremely large contracts. In such a case, the actual renewal value is a more meaningful figure than the number of contracts renewed. - https://bit.ly/3LaKfAK
What is PPC optimization?
Pay-per-click optimization, or PPC optimization, is the practice of analyzing and improving your PPC campaigns at the campaign and ad group level, like by updating landing pages, changing ad copy, or modifying keyword bids.
What does PPC optimization entail?
Optimizing your PPC ads isn’t as intimidating as it might sound. PPC optimization is simply the practice of improving different elements of your ads so that they win real estate and earn more clicks.
There’s a lot of things that go into an ad campaign, so there are also a lot of elements to optimize.
Your ad is essentially useless if it’s not perfectly augmented for search, which is why optimization is so important to any PPC campaign strategy. When you want to optimize your PPC ads, there are a few different areas to consider:
- The ads themselves – the text, photos, design, colors, etc.
- Ad landing pages
- Keyword targeting
These three areas are the most important to PPC optimization. Read on to learn how they’re involved in the optimization process!
5 step PPC optimization checklist for successful ads
After optimizing the elements on our checklist, your PPC ads will be set for success!
1. Perform keyword research
Before launching a PPC campaign, you’ll want to research the most beneficial keywords for your business.
When we say, “most beneficial,” we’re referring to the keywords that’ll bring the most clicks to your ads. Start with a good old-fashioned brainstorm.
First, select generic, general keywords related to your basic products and services. These keywords on their own likely won’t be the best to target since their competition is so high.
For instance, “women’s cowboy boots,” a general term, gets a much higher search volume than “totes women’s waterproof snow boots,” an extremely specific search term.
This outlines in part why keyword research is so essential — identifying general keywords is important, but it’s crucial to come up with long-tail keywords as well.
During your brainstorming session, try combining your general terms with adjectives relating to your product offerings.
This will help you create your list of keywords to target.
The next step involves plugging your keywords into a tool like searchvolume.io to gain insight into search volume and competition.
The best keywords will have a high search volume and low competition. This step will help you choose keywords that are the most valuable to your campaign.
2. Create a list of negative keywords
Just like it’s essential to target the right keywords, it’s also a critical part of PPC optimization that you decide what not to target.
When you use negative keywords, you essentially exclude specific keywords from your campaign that might seem like they fit your product offerings, but they don’t.
For example, if you’re a hardware store that sells home interior paint, one of your negative keywords might be “vehicle paint” or “outdoor paint.” This ensures that people searching for those terms don’t land on your site.
3. Use demographic targeting to reach the right audience
One of the things that makes PPC so successful is the fact that you can decide exactly who your ads are served to, based on demographics.
In the past few years, Google Ads has made their targeting options even more granular and now offers more targeting options than ever.
Take a look at just a few of the ways you can target your most qualified audience!
- Age: This is great if you sell products that are for a certain age group.
- Gender: This targeting option works for companies that sell a product that is made for a specific
- Income level: If your company prides itself on the low cost of your products, you could target a lower income level. On the other hand, if you offer high-class products, you have the option to target a higher income level.
- Geographic location: One of the most popular and effective ways to target your audience is by geographic location. You can serve them ads based on their country, state, city, or specific boundaries that you create.
- Relationship status: Google gives you the option to target singles, married couples, or people in relationships.
- Education level: Whether you want to target customers with a high school diploma, those in college, or those going for their master’s degrees, Google Ads has options for you!
Choosing who you want to target with your keywords is a vital decision and can determine the level of campaign success, so review your targeting as part of your PPC campaign optimization.
4. Test your ad copy
Your ad copy can make or break a click, so it’s vital to your PPC optimization process that you test and analyze your copy.
In order to test your ad copy, you’ll want to set up an A/B test. This kind of test allows you to assess two ads with varying copy to determine which one receives the most clicks. Keep in mind that ad copy isn’t the only thing you can test with A/B ads — you can also test the colors, the landing pages, and the calls-to-action.
When you set up an A/B test for your PPC ads, Google will serve your two ads at random to different users. At the end of the testing period, you’ll have a good idea of what ad got more clicks, and therefore, which ad you should use moving forward.
5. Create a conversion-worthy landing page
A landing page is where users end up when they click on your ad, and it is essentially the deciding factor in whether or not a user makes a purchase.
That’s why it’s one of the most important PPC optimization strategies. Of course, users can navigate away from your landing page if they got distracted or if they’re waiting for next payday, but your landing page as a whole should convince them that they want to purchase your product.
Check out this mini-checklist of what you should feature on a conversion-worthy landing page:
- A picture of the product in your ad
Nothing is more of a turnoff than a landing page that isn’t at all related to the ad that a user clicked. When a user clicks an ad, they’re interested in that product, which means your landing page should be all about, you guessed it, that very product!
Associating cost with a product is a big deciding factor when a user is on the fence. You’ll want to be sure that the price is loud and proud on your landing page so that a user can decide if the product fits their budget.
- Information about the product
You should think of your landing page as the final step in a buyer’s journey — the last chance you have to wow them with your product.
To do so, you should include a detailed description that features product dimensions, materials used, care instructions, available colors, and available sizes.
Including this information gives users everything they need to make an educated decision on whether or not they want to go through with a purchase. Shortage of this information could cause them to second guess your product because they don’t know if you carry the color they want or the size they need.
- A powerful call to action
Perhaps the most critical part of a landing page is the call-to-action.
This could be a button that says, “add to cart,” “buy now,” “learn more,” or “call now.” It depends on the product or service that you’re selling and what the next step is in the buyer’s journey.
For example, if you’re selling a service, the call-to-action might be “call today for a free quote!”, and if you’re selling a product, it might be “buy now.”
https://bit.ly/3ywR4Ko
MRR (Monthly Recurring Revenue) — is the company's
regular monthly income. This metric is tracked by startups, SaaS services and
other companies that work on a subscription model.
Why
MRR is important
MRR
is one of the indicators of business success. If the monthly income of the
company is growing steadily, then the products and services are in demand in
the market. Situations where the MRR stays the same or decreases indicate that
action needs to be taken. For example, to finalize the marketing strategy,
improve user experience, improve the quality of the product, better study the
target audience.
Based
on the MRR, companies set goals for the marketing and sales department. Clearly
formulated tasks help to develop an action plan, set priorities correctly and
increase the company's income step by step. MRR also allows you to plan
profits, better distribute the company's budget and generate forecasts for
business development. Next, you will learn how to calculate this indicator.
How
to calculate MRR
To
find out the average monthly income, you need to multiply the number of
customers by the amount of the average income per buyer.
MRR = ARPPU×number of buyers
To
calculate ARPPU, use the following formula:
ARPPU = Company Monthly
Revenue / Number of Customers
Let's
take a look at the calculation of MRR using the example of a company that
provides subscription training courses. Suppose the average income per customer
per month is $ 20, the total number of customers for this period is 100 people.
We do the calculation:
MRR = 20×100 = $2000
It
turns out that the average monthly regular income of the company is $ 2,000.
Now that you know why you need MRR and how to calculate it, it's time to get
acquainted with the main mistakes that can be made when calculating this
indicator.
Main
MRR Calculation Errors
Let's look at the main errors
that companies make in their calculations.
• Ignoring discounts.
When calculating MRR, the accuracy of the data used is important. Therefore, if
the subscription cost is $10, and the client pays only $5, since he has a 50%
discount, then the actual amount of payment - $5 - should be taken into
account.
• Accounting for one-time
payments. If, in addition to the subscription, the company provides paid
services, for example, expert advice, then you should not include them in the
MRR. To calculate the average monthly income, only recurring payments are used
from period to period.
• Accounting for users in
the trial period. Not all leads become customers. Registration of a trial
free subscription by the user does not yet guarantee its payment in the future.
Therefore, counting possible purchases as income is a big mistake.
For accuracy of calculations,
other types of MRR should be taken into account:
• New MRR (New MRR) -
additional income from new customers;
• Expansion MRR (extended MRR)
- profit from existing customers by switching to a more expensive tariff;
• Churned MRR (Lost MRR) -
lost revenue associated with the outflow of customers.
In the next section, you'll
learn how to increase your company's average monthly income.
How
to improve MRR
Since MRR is directly related
to the level of customer retention and loyalty, build long-term relationships
with them and strengthen the emotional connection. To do this, combine email
newsletters, chat bots, SMS, web push notifications into a single omnichannel
strategy. Track customer churn, develop loyalty programs. If a customer stops
using the service or wants to unsubscribe, find out the reason and try to fix
it.
Cultivate real brand advocates
who will recommend the company's products to their friends and acquaintances,
start word of mouth, improve your sales funnel and your marketing strategy to
reduce CAC - the cost of customer acquisition. To increase MRR, motivate users
to switch to more expensive tariff plans. Communicate the benefits of
additional features to your target audience and invite them to try them out.
Gather customer feedback on a
regular basis, improve your customer acquisition strategy, improve service
quality, increase retention, and your MRR will grow.
What is Return on Ad Spend (ROAS)?
Return on ad spend (ROAS) is a marketing metric that measures the amount of revenue earned for every dollar spent on advertising. Similar to return on investment (ROI), ROAS measures the ROI of money invested into digital advertising. In addition to the overall ROAS of an entire marketing budget, it can be measured more granularly based on specific ads, targeting, campaigns, and so on.
How do you calculate return on ad spend?
Return on ad spend is calculated as follows:
ROAS = Revenue attributable to ads / Cost of ads
For example, if you invest $100 into your ad campaign and generate $250 in revenue from those ads, your ROAS is 2.5. (Hashtag: winning!)
There are several ways to determine the cost of ads. you may want to track just the actual dollar amount spent on a particular ad platform, whereas other times you may want to include additional advertising costs such as:
- Salary Costs: The cost of in-house or contracted personnel who manage the ad campaign.
- Vendor Costs: This includes fees and commissions from vendors that facilitate the ad campaign.
- Affiliate costs: This can include individual affiliate commissions and any affiliate network fees.
Depending on the type of ad campaign you’re running, it’s often useful to calculate the ROAS purely based on ad costs, and a separate ROAS that includes these additional advertising expenses to get a more complete picture of the campaign’s profitability.
Uses of return on ad spend
In the context of mobile marketing, ROI is among the most critical metrics for app advertisers. ROI is a global metric that measures an organization’s overall profits after all expenses, whereas ROAS allows marketers to measure exactly how much advertising is contributing to the bottom line.
Tracking ROAS across campaigns and ad platforms also allows marketers to measure, evaluate, and compare the effectiveness of their advertising efforts. As mentioned, ROAS can be broken down into the return on a particular ad platform, campaign, or ad, allowing marketers to evaluate where they’re achieving the highest level of profitability.
Before launching an ad campaign, it’s recommended to determine a minimum, acceptable, and target ROAS. BigCommerce highlights that there is no “right” answer to what can be considered a good ROAS as this will change based on the organization’s profit margins and other operating expenses. Typically, however, a common benchmark for an acceptable ROAS is 4:1, meaning for every $1 of ad spend you generate $4 in revenue.
A ROAS at that level not only provides ROI on your actual hard advertising costs, but also the associated costs we mentioned earlier: salaries, vendor costs, and everything else it takes to run a business.
By combining ROAS with other metrics such as cost per acquisition (CPA), cost per lead (CPL), and cost per click (CPC), advertisers get a more complete picture of the KPIs they need to hit in order to reach certain revenue targets. Looking at these PPC metrics more holistically can also provide an indication of traffic and lead quality from each ad source. For example, PPC Hero highlights that if you have a low CPL and a low ROAS, this indicates that the lead quality may not be sufficient for that campaign. Similarly, if you have a higher than average CPL but also a high ROAS, the leads may be more qualified than other channels, in which case your CPL benchmarks may need to be raised. - https://bit.ly/3w7gyMH
Digital marketing strategies are often developed and implemented within a framework known as the POEM model. The POEM model stands for paid, owned and earned media and the framework will help any digital marketing company improve their marketing strategies and achieve goals and targets. With the POEM model, internet marketing services will look at creating content or developing strategies for different types of media.
POEM is an approach used to promote a product or service and looks at how the right mix of media types can attract more customers, deepen and strengthen relationships with existing customers, and push the business towards ultimate goals of growth and success.
In order to better understand what POEM is, a digital marketing agency should dissect the approach and consider what each letter stands for.
Paid media
The first type of media to consider in this framework for digital and social media marketing strategies is paid media, which come in the form of outbound campaigns. This is any form of media which requires a variable cash outflow to gain additional exposure.
The main goal of paid media is to deliver paid or sponsored ads and ensure it reaches the right audience. Types of paid media a digital marketing agency in Sri Lanka like Ontomatrix will incorporate in strategies include pay-per-click or PPC marketing, social media marketing, and email marketing.
Owned media
The second type of media to consider is owned media, which uses nurture and retention marketing. Owned media is media the company invests and builds and can gain additional exposure from without a variable cash outflow to buy media.
Owned media gives you the freedom to control content within endless possibilities and the goal of this type of media is to provide quality content for the audience. Internet marketing services like websites, email marketing, and newsletters are examples of owned media.
Earned media
Earned media or inbound marketing is the media exposure the brand receives as a result of other people talking about the brand. There is no cash outflow for additional exposure.
Digital marketing services use earned media to create content that can be used on the brand’s website. Blogs, which are a key tool used in content marketing, is an example of earned media as it uses articles and infographics created for the brand. The content can be then shared on social media platforms as part of the brand’s social media marketing strategy in order to attract new customers and engage with existing customers.
This enables the business to expand their audience reach while also increasing their customer base.
BENEFITS OF THE POEM MODEL
Each component of the POEM model has its own strengths and weaknesses and the core elements differ from media to media.
Benefits of Paid media
Advertisements are a key element in social media marketing and this is a type of paid media. Display ads, online video ads, and paid search are all types of paid media. One of the core elements of this type of media is the understanding that cash outflow is required in order to generate traffic.
The benefits of paid media include immediate results, scalable measures, measurable results, and ease of testing.
Benefits of Owned media
A digital marketing agency may use a brand website, a brand’s social profile, a mobile application or seeded content to reach the target audience. These channels are considered owned media. Owned media can be a cost-effective method of strengthening relationships with existing customers and attracting new customers.
Longevity, loyalty, and ease of targeting are other benefits of this type of media.
Benefits of Earned media
Internet marketing services focus heavily on engagement and earned media comes in the form of likes, shares and comments, as well as blogs and forums, ratings and reviews, and other conversations. One of the core elements of earned media is the effort that goes into these strategies and tactics. However, visibility can continue even after effort stops.
The benefits of earned media include cost effectiveness, visits that are of a higher quality, and the role played by earned media to build trust among existing customers and potential customers.
Considering the key differences and benefits of paid, owned, and earned media and the POEM model as a whole, it is safe to say that one can arrive at three main conclusions. The first is that content created and uploaded on owned media becomes earned media when it receives high user engagement and paid media when the content is sponsored or boosted.
The second conclusion is that paid media is often the foundation to driving the audience to owned media, where they will share it, turning the content into earned media. For this reason, companies usually start with paid media.
Finally, a digital marketing company may use these three media in a strategic combination to ensure the content has a higher chance of being seen and consumed by the target audience. - https://bit.ly/3yzrMeP
Pictures - https://bit.ly/34MUjkr