Flywheel Model

 

Alexey Cherkasov

If we speak in simple language and do not delve into the physical side of the issue, then we can give the following definition a flywheel. It is a device that has the shape of a wheel and serves to accumulate and then release rotational energy. The amount of energy it accumulates depends on three factors: the speed of rotation, the amount of friction, and the size of the wheel. The principle of operation of the flywheel has been known since ancient times, it was used, for example, in a potter’s wheel or windmills.

Over time, the flywheel expanded its scope of application and began to be actively used in the industrial environment, in particular in the automotive industry. In these areas, the flywheel is used for its intended purpose, but this article will focus on the application of the flywheel effect in areas such as management, marketing, and sales. What does it look like in practice? 

The first attempt to shift the concept of the flywheel from the physical field to the field of management was made in the book Good to Great: Why Some Companies Make the Leap … and Others Don’t by Jim C. Collins. Jim C. Collins describes the process of turning good companies into great ones. He explains that not all companies reach the top, most fail on their way, but nevertheless, there are those who succeed. Any changes require effort, nothing happens in one fell swoop, it is necessary to carry out hard work to achieve the desired result. And this process can be compared to the work of a flywheel, when you spin the mechanism turn by turn, gradually at first, and then gaining momentum until you reach the moment of breakthrough.

HubSpot adapted the flywheel model and combined it with an inbound marketing strategy. You can learn more about this strategy in the book Inbound marketing. Get found using Google, Social Media, and Blogs by Brian Halligan and Dharmesh Shah. Inbound marketing is the use of methods by which consumers themselves find sellers using the Internet. What do you need to do to get people to find you?

Brian Halligan and Dharmesh Shah answer this question: it is necessary to have a Remarkable proposition. It should be included in your Remarkable Strategy. In addition to a Remarkable proposition, you should also create Remarkable content. The authors provide the following types of content: Blog articles, White papers, Videos, Webinars, Podcasts, Webcasts.

The effectiveness of your marketing activities these days can be expressed in the following sequence of steps: create Remarkable content, optimize it, publish the content on the Internet, market the content through the blogosphere and social media, and measure which methods bring results, which do not.

The main idea of the HubSpot flywheel model is that in order for your organization to grow, it needs to provide an amazing user experience through inbound marketing. This is what the HubSpot flywheel model looks like.

Funnel

To begin with, the flywheel model is contrasted with the traditional sales funnel. Recall that the goal of any funnel is to turn a potential buyer into a customer, for this, as a rule, he must go through a certain path, which usually has 4 stages:

• Awareness. This is the stage of getting acquainted with a product or service, when you first encounter them, an initial contact. 
• Interest. You will learn more information about a product or service and this causes you positive feedback, a response. You are showing interest.
• Desire. After the Interest stage, your feelings develop and become deeper. You have a desire to get this product or a desire.
• Action. This is the final stage. You have a clear intention to act.

There are various variants of funnels, but they usually have the following structure:

• TOFU. Top of the funnel. The beginning of the process. Regarding potential customers, there are many of them, but not all are going to act.
• MOFU. Middle of the funnel. The middle of the process. Half goes away, but half stays. They had a reason for this. It is necessary to continue to nurture.
• BOFU. Bottom of the funnel. The end of the process. At this stage, decisions are made. There are not so many customers left, but they are all targeted, they have gone through the process to the end. Don’t leave them.

In the book Inbound marketing. Get found using Google, Social Media, and Blogs Brian Halligan and Dharmesh Shah use a marketing funnel to make decisions about marketing actions (for example, which tools or channels to use or not to use).

All the presented models of funnels are limited to the last stage when the action is completed, that is, the client has turned into a customer. But what’s next? This question is precisely answered by the flywheel model.

As we can see, there are 4 types of consumers in it: Strangers, Prospects, Customers, and Promoters. We can correlate the first three types with the sales funnel, that is, at the first stage a person does not know about you, he is a Stranger, then he receives some information and shows interest, he is Prospect, after which he makes a decision, he is the Customer.

But here is the fourth type, to which it is necessary to strive for business development, which is completely new. This is your brand advocate; he is loyal to you and protects your interests. But you need to understand that this does not happen because of a simple courtesy on the part of your client. This is a constant and time-consuming process on your part, which is aimed at satisfying the interests and needs of your customer. The flywheel model puts customers’ satisfaction at the center, regardless of what stage of the purchase they are at, as well as after the purchase.

HubSpot realized that a typical funnel was incompatible with their desire to satisfy their customers and create an unforgettable user experience, which is why they built the flywheel model into their inbound marketing strategy. This model ensures the transformation of prospects into promoters using frictionless content. We have already mentioned that there are three factors that need to be taken into account in order for your flywheel to work flawlessly. Here they are: 

• rotation speed – the faster the flywheel rotates, the harder it is to stop it
• amount of friction – friction can slow down your momentum and hinder forward movement
• wheel size – the larger the size of the flywheel, the longer it takes to accelerate it, but at the same time it has strong momentum

So, for a successful result, companies must pay due attention to all three factors. The first thing you need is to increase the rotation speed. This can be done by adding force to the most promising areas. Further, we see that friction is the biggest enemy for the development of the organization. Eliminating friction allows your flywheel to rotate freely. The more you increase speed and reduce friction, the more you will create promoters of your business. And all these promoters become the force that spins your flywheel. The more promoters you have, the larger the size of your wheel, thus it will be more difficult to stop it.

Let’s return to the components of the flywheel model, we see in addition to the types of clients, the following phases are also presented here: attract, engage, and delight. What do they mean?

Attract Phase

Already from the name, we understand that the main goal of this stage is to attract. But it should be based on the voluntary desire of people, they should want it themselves, you should not be overly intrusive. The best way to cope with this task is to provide useful content. It works as follows: when a user has a need for something, it does not necessarily have to be a desire to purchase something, but he may want to learn something, then you should already have the relevant content ready. The user will find it, your task is search engine optimization and high-quality content. Do not forget also about working with social networks as the most popular communication channel between you and potential customers.

Engage Phase

You have attracted the attention of a future buyer. What’s next? Then you have to make it easier for them to make a purchase. How? Make it so that they can easily interact with you on their own terms, at their own time, and through their preferred channels. The buyers must decide for themselves, and you must adapt to their interests. Look at the prospect as a partner with whom you want to build a long-term relationship, and not as a one-time wallet. Tools such as website and email personalization, communication with your potential customers, free trial versions, and more will help you with this.

Delight Phase

At this stage, the Customer turns into a Promoter, which means at this stage you have to help and support your customers. Offer documentation and knowledge bases that will help clients get more value from what you offer. Be available to your customers via messengers, chatbots, e-mail, answer their questions, keep in touch, ask their opinion, conduct surveys. Develop a loyalty program. All these tools will help you win the hearts of people and make them your followers who will recommend your product or service.

So, we can conclude that your customers are your best friends who will help your company grow. And the flywheel model is based on this idea. Do not forget that the flywheel has the shape of a wheel, which means that the process of attracting and retaining customers must occur constantly, cyclically. Do not stop, but spin your wheel, give it momentum with the help of additional forces, accelerate, grow and move only forward. 

https://www.marketing-psycho.com/

Marketing Funnel

 

The marketing funnel in marketing is a tool that displays the consumer’s path to the target action. The earliest option is the sales funnel (or the purchase funnel). William W. Townsend described the sales funnel in the book Bond Salesmanship in 1924, in which he developed the idea of AIDA and presented it in the form of a funnel. The first principles of the AIDA model were proposed by the American advertising specialist E. St. Elmo Lewis in 1898 and illustrated a successful way of composing advertising. AIDA is an abbreviation of four words: Awareness, Interest, Desire, and Action.  

For advertising to work, it must meet the above points, since, following the proposed concept, the consumer goes through these four stages to make a purchase decision.

William W. Townsend applied these principles to create a funnel that illustrates the customer’s movement from the first contact with a product or service to the moment of purchase. The basic view of the funnel has the following form:

1. Awareness. This is the stage of getting acquainted with a product or service, when you first encounter them, an initial contact. 
2. Interest. You will learn more information about a product or service and this causes you positive feedback, a response. You are showing interest.
3. Desire. After the Interest stage, your feelings develop and become deeper. You have a desire to get this product or a desire.
4. Action. This is the final stage. You have a clear intention to act.

You use this funnel to show how a potential client turns into a customer. But over time, it became clear that it does not fully reflect the interests of the parties, both consumers and producers of the product or service. Therefore, in the modern world, there are a huge number of options for funnels created in accordance with the goals. Some of them have expanded the principles of AIDA, others have adapted them to their field of activity. 

Derek Rucker proposes a modification of AIDA, which he called the 4-A theory: aware, attitude, act, and act again. In this latter context, the stages of interest and desire are simplified to a relationship, and a new stage appears – act again. This framework is designed to track customer behavior after purchase and measure customer loyalty.

The customer path in the era of connectivity must be rewritten. From 4-A to a 5-A structure: awareness, appeal, ask, act, advocate.

In the book Inbound marketing. Get found using Google, Social Media, and Blogs Brian Halligan and Dharmesh Shah use a marketing funnel to make decisions about marketing actions (for example, which tools or channels to use or not to use).

1- Prospect. At this stage, you create a list of sources/campaigns/ inputs that will attract prospects to your products and services. 

2- Leads. Leads can be any person with whom the seller (or you) has the right to spend at least an hour demonstrating their product or discussing your service.

3- Opportunity. At this stage, the potential customer has a specific employee within the company (“champion”) who advocates for the purchase of your company’s product or service. 

4- Customer. These are people who have purchased your products or used your service.

Once you understand the levels of the marketing funnel, start evaluating each level on a quarterly or monthly basis. The main information that you will get with this analysis is the shape (ratios) of the funnel per campaign/channel.

Despite what tools or channels of Inbound marketing you will use, Brian Halligan and Dharmesh Shah throughout the book say that it is necessary to track the results, and based on this data, make improvements.

And in the book Top of Mind. Use content to unleash your influence and engage those who matter to you John Hall describes a funnel for content marketing.

Top of the funnel: Awareness

At this stage, the consumer is aware of the specific problem they are facing. He wants to study and understand it. It has a huge number of questions and is looking for answers to them. That’s why it’s so important for you to provide educational content that tells people what the problem is. At this stage, the distance between your customer and the purchase decision is long.

Middle of the funnel: Consideration

Your goal is to help the consumer make an informed decision and offer them assistance. Your audience has already identified the key issues, now it’s time to investigate them. This is the perfect time to give the customer some awesome content that doesn’t sell but helps them. The research stages are the longest of the entire journey. At this stage, you need to be patient and be constant.

Bottom of the funnel: Decision

At the last stage, your audience is already sufficiently aware of their problem and how to solve it. Now they are ready to make a decision. We need to help them do this. Answer all their questions and create strong and evidence-based content. If you are the best choice, explain why. Good content at the last stage differentiates your company. 

But despite the purposes for which the funnel is used, the principle of its creation is usually as follows:

The funnel should go from large to smaller. At first, you launch the process and aim at a large coverage, and then gradually narrow down and lead to targeted action.

TOFU. Top of the funnel. The beginning of the process. Regarding potential customers, there are many of them, but not all are going to act.

MOFU. Middle of the funnel. The middle of the process. Half goes away, but half stays. They had a reason for this. It is necessary to continue to nurture.

BOFU. Bottom of the funnel. The end of the process. At this stage, decisions are made. There are not so many customers left, but they are all targeted, they have gone through the process to the end. Don’t leave them.

Create your own marketing funnels or use existing ones, track the results, so you can see what problems arise at each level, which means you can analyze the situation and fix it, and this will lead to achieving your goals.

https://www.marketing-psycho.com/

Flywheel Model

 If we speak in simple language and do not delve into the physical side of the issue, then we can give the following definition a flywheel. It is a device that has the shape of a wheel and serves to accumulate and then release rotational energy. The amount of energy it accumulates depends on three factors: the speed of rotation, the amount of friction, and the size of the wheel. The principle of operation of the flywheel has been known since ancient times, it was used, for example, in a potter’s wheel or windmills.

Over time, the flywheel expanded its scope of application and began to be actively used in the industrial environment, in particular in the automotive industry. In these areas, the flywheel is used for its intended purpose, but this article will focus on the application of the flywheel effect in areas such as management, marketing, and sales. What does it look like in practice? 

The first attempt to shift the concept of the flywheel from the physical field to the field of management was made in the book Good to Great: Why Some Companies Make the Leap … and Others Don’t by Jim C. Collins. Jim C. Collins describes the process of turning good companies into great ones. He explains that not all companies reach the top, most fail on their way, but nevertheless, there are those who succeed. Any changes require effort, nothing happens in one fell swoop, it is necessary to carry out hard work to achieve the desired result. And this process can be compared to the work of a flywheel, when you spin the mechanism turn by turn, gradually at first, and then gaining momentum until you reach the moment of breakthrough.

HubSpot adapted the flywheel model and combined it with an inbound marketing strategy. You can learn more about this strategy in the book Inbound marketing. Get found using Google, Social Media, and Blogs by Brian Halligan and Dharmesh Shah. Inbound marketing is the use of methods by which consumers themselves find sellers using the Internet. What do you need to do to get people to find you?

Brian Halligan and Dharmesh Shah answer this question: it is necessary to have a Remarkable proposition. It should be included in your Remarkable Strategy. In addition to a Remarkable proposition, you should also create Remarkable content. The authors provide the following types of content: Blog articles, White papers, Videos, Webinars, Podcasts, Webcasts.

The effectiveness of your marketing activities these days can be expressed in the following sequence of steps: create Remarkable content, optimize it, publish the content on the Internet, market the content through the blogosphere and social media, and measure which methods bring results, which do not.

The main idea of the HubSpot flywheel model is that in order for your organization to grow, it needs to provide an amazing user experience through inbound marketing. This is what the HubSpot flywheel model looks like.

Funnel

To begin with, the flywheel model is contrasted with the traditional sales funnel. Recall that the goal of any funnel is to turn a potential buyer into a customer, for this, as a rule, he must go through a certain path, which usually has 4 stages:

• Awareness. This is the stage of getting acquainted with a product or service, when you first encounter them, an initial contact. 
• Interest. You will learn more information about a product or service and this causes you positive feedback, a response. You are showing interest.
• Desire. After the Interest stage, your feelings develop and become deeper. You have a desire to get this product or a desire.
• Action. This is the final stage. You have a clear intention to act.

There are various variants of funnels, but they usually have the following structure:

• TOFU. Top of the funnel. The beginning of the process. Regarding potential customers, there are many of them, but not all are going to act.
• MOFU. Middle of the funnel. The middle of the process. Half goes away, but half stays. They had a reason for this. It is necessary to continue to nurture.
• BOFU. Bottom of the funnel. The end of the process. At this stage, decisions are made. There are not so many customers left, but they are all targeted, they have gone through the process to the end. Don’t leave them.

In the book Inbound marketing. Get found using Google, Social Media, and Blogs Brian Halligan and Dharmesh Shah use a marketing funnel to make decisions about marketing actions (for example, which tools or channels to use or not to use).

All the presented models of funnels are limited to the last stage when the action is completed, that is, the client has turned into a customer. But what’s next? This question is precisely answered by the flywheel model.

As we can see, there are 4 types of consumers in it: Strangers, Prospects, Customers, and Promoters. We can correlate the first three types with the sales funnel, that is, at the first stage a person does not know about you, he is a Stranger, then he receives some information and shows interest, he is Prospect, after which he makes a decision, he is the Customer.

But here is the fourth type, to which it is necessary to strive for business development, which is completely new. This is your brand advocate; he is loyal to you and protects your interests. But you need to understand that this does not happen because of a simple courtesy on the part of your client. This is a constant and time-consuming process on your part, which is aimed at satisfying the interests and needs of your customer. The flywheel model puts customers’ satisfaction at the center, regardless of what stage of the purchase they are at, as well as after the purchase.

HubSpot realized that a typical funnel was incompatible with their desire to satisfy their customers and create an unforgettable user experience, which is why they built the flywheel model into their inbound marketing strategy. This model ensures the transformation of prospects into promoters using frictionless content. We have already mentioned that there are three factors that need to be taken into account in order for your flywheel to work flawlessly. Here they are: 

• rotation speed – the faster the flywheel rotates, the harder it is to stop it
• amount of friction – friction can slow down your momentum and hinder forward movement
• wheel size – the larger the size of the flywheel, the longer it takes to accelerate it, but at the same time it has strong momentum

So, for a successful result, companies must pay due attention to all three factors. The first thing you need is to increase the rotation speed. This can be done by adding force to the most promising areas. Further, we see that friction is the biggest enemy for the development of the organization. Eliminating friction allows your flywheel to rotate freely. The more you increase speed and reduce friction, the more you will create promoters of your business. And all these promoters become the force that spins your flywheel. The more promoters you have, the larger the size of your wheel, thus it will be more difficult to stop it.

Let’s return to the components of the flywheel model, we see in addition to the types of clients, the following phases are also presented here: attract, engage, and delight. What do they mean?

Attract Phase

Already from the name, we understand that the main goal of this stage is to attract. But it should be based on the voluntary desire of people, they should want it themselves, you should not be overly intrusive. The best way to cope with this task is to provide useful content. It works as follows: when a user has a need for something, it does not necessarily have to be a desire to purchase something, but he may want to learn something, then you should already have the relevant content ready. The user will find it, your task is search engine optimization and high-quality content. Do not forget also about working with social networks as the most popular communication channel between you and potential customers.

Engage Phase

You have attracted the attention of a future buyer. What’s next? Then you have to make it easier for them to make a purchase. How? Make it so that they can easily interact with you on their own terms, at their own time, and through their preferred channels. The buyers must decide for themselves, and you must adapt to their interests. Look at the prospect as a partner with whom you want to build a long-term relationship, and not as a one-time wallet. Tools such as website and email personalization, communication with your potential customers, free trial versions, and more will help you with this.

Delight Phase

At this stage, the Customer turns into a Promoter, which means at this stage you have to help and support your customers. Offer documentation and knowledge bases that will help clients get more value from what you offer. Be available to your customers via messengers, chatbots, e-mail, answer their questions, keep in touch, ask their opinion, conduct surveys. Develop a loyalty program. All these tools will help you win the hearts of people and make them your followers who will recommend your product or service.

So, we can conclude that your customers are your best friends who will help your company grow. And the flywheel model is based on this idea. Do not forget that the flywheel has the shape of a wheel, which means that the process of attracting and retaining customers must occur constantly, cyclically. Do not stop, but spin your wheel, give it momentum with the help of additional forces, accelerate, grow and move only forward. 

Alexey Cherkasov

https://bit.ly/3pncgws

Customer Acquisition Toolbox. Part 2.

 (Continuation. Previous part 1 - https://bit.ly/3Jz4SpU)

Committed Monthly Recurring Revenue (CMRR)

Committed Monthly Recurring Revenue (CMRR) is a prediction metric that combines recognized, monthly recurring revenue (MRR) with new bookings, churn, and downgrades/upgrades. Fees, like one-time installations, are generally excluded from CMRR calculations.

This metric provides a more accurate prediction of income than MRR. It’s what banks will want to see when issuing credit, and it’s what investors and board members will want to see to monitor progress.

It’s important to note that there is no standard definition for committed monthly recurring revenue (CMRR), so it’s up to your company to determine the most accurate metric for measuring your data. However, most SaaS companies are using the following formula (or something similar):

CMRR = MRR + New Bookings + Churn + Downgrades + Upgrades

The pieces of this CMRR equation

• Monthly recurring revenue (MRR) is all of your recurring revenue normalized into a monthly amount. If your average customer pays $10 per month, and you’ve got 100 customers, then your MRR is $1,000.
• New bookings means new, committed business – both parties have signed the contract.
• Churn MRR is the rate at which you lose subscribers. If you lose 1 subscriber per month, on $10 subscriptions, then your Churn MRR is $10.
• Downgrades and upgrades are known, positive or negative changes to your subscribers’ accounts. If customer A downgraded their account for next month, then that’s considered in CMRR. If customer B’s account will automatically upgrade come the new year, then that’s also considered in CMRR.

The CMRR metric uses recognized monthly recurring revenue. What’s the difference between recognized MRR and non-recognized MRR?

Recognized implies revenue recognition. Revenue recognition is an accounting principle meaning to recognize any payment you receive as revenue; you must first deliver the product(s) or service(s) entirely. So, if your subscribers pay up-front on May 1st, your accountant won’t recognize that revenue until June 1st.

The value of CMRR

CMRR takes the big picture into account. You can’t forecast using MRR. Why? Because MRR doesn’t account for churn, upgrades, or downgrades. CMRR does, therefore giving you a solid and reliable income prediction.

When you visualize it, it’s easy to see why churn, new bookings, etc. are important when forecasting…

As you can see, new bookings and churn affect our curve a great deal. In this example, we’re still a positive line, but many who try and predict income with monthly recurring revenue (MRR) are in for a rude awakening since they’ve forgotten to factor in churn and downgrades. - https://bit.ly/3MbyE5M

CMRR Definition

Defining CMRR isn’t so easy. There is no fixed definition, and there are certainly no fixed rules about what to include in the formula. Here’s what most businesses provide as a definition:

“CMRR is the value of recurring portion of subscription revenue.”

Hmm. That doesn’t really tell us much! I thought MRR was just about the recurring revenue portion of a business anyway, how is this different? Because CMRR is a metric that’s also used in more traditional fixed-term-based payment structures (i.e. non-recurring revenue). For non fixed-term-based models (SaaS, subscription), we can use a slightly clearer definition of what CMRR really equates to:

“CMRR for a SaaS business is a projection of MRR in a future period, modified to take into account any guaranteed revenue expansion or anticipated churn over the period.”

Now that makes more sense as a definition for subscription businesses. CMRR is similar to MRR, but gives us a more realistic projection of monthly revenue, accounting for adjustments to recurring revenue that we already know about.

What’s Included in CMRR?

• MRR! You still need to include the core MRR of your business.
• Guaranteed new business that you know about for the period – e.g. If a customer has signed a contract for an account with you which only comes into effect in the following month – you can include this New Business MRR in your CMRR calculation.
• Guaranteed account expansion from upgrades that you know will take place in the period – e.g. If a customer is on a plan that requires them to upgrade after a certain time, this is expected Expansion MRR that you can include in your CMRR calculation.
• Anticipated churn for the specified period – e.g. A customer has stated that they don’t intend to renew their account in the following month, so you can factor this as churn in your CMRR calculation. Note: This churn is not 100% guaranteed – you still have the chance to reverse the customer’s decision!
• Anticipated downgrades for the specified period – e.g. You expect the customer to downgrade their account, due to either the customer stating so, or to features of your pricing model.

Example:

I have 120 customers, each paying $60 per month in subscriptions. For the next month I have a guaranteed expansion MRR of $1200 and an expected churn of  $500.

My CMRR for the next month is 7200 + 1200 – 500 = $7900.

Here’s a visual representation of the difference between measuring MRR and CMRR:

A chart demonstrating the additional components considered in CMRR.

CMRR Formula

At a high level, the formula for CMRR is fairly simple:

Despite this simple formula, there may be other elements that could be included in the CMRR calculation – there is no standard definition for this so you’ll need to decide what makes sense for your business.

Where can it be useful?

CMRR is always a forward-looking metric, i.e. it’s only applicable when calculated for future time periods, where you have potential expansion and churn that hasn’t happened yet.

Because of this, CMRR paints a more realistic picture of a recurring business. Particularly in the case of a high churn rate, CMRR would produce a slightly more pessimistic outlook – taking into account the anticipated churn (although additional revenue from expansion may balance this out).

Here are some uses of CMRR:

• CMRR appears to be more of a “VC metric” – i.e. something that investors would want to see, particularly as an indicator of the health of a business, based on projections.
• As Philippe Botteri (Accel Partners) mentions, breaking down the average CMRR by different dimensions (such as per customer) can lead to a more insightful analysis.
• Christoph Janz (Point Nine Capital) also mentions that CMRR is more relevant for enterprise-targeted businesses, where the sales cycles are typically much longer and the need for such projections are greater. Smaller SaaS startups selling mainly monthly deals to SMBs may not find so much use in the metric. - https://bit.ly/3Pgzqk3

More meaningful metric is the Committed Monthly Recurring Revenue or CMRR.

CMRR = MRR + purchase orders for future recurring revenues - revenues that is likely to churn within the year

This graph presenting the different components of the CMRR communicates all the highlights of the business: new accounts (green), organic growth (purple), renewals (blue) and churn (red arrows). Comparing the CMRR to the monthly expenses is a also a key indicator of the health of the business.

In addition to the CMRR, there are a few other key metrics that SaaS companies need to monitor on a monthly basis:

Number of customers

Average CMRR per customer

Average number of "product" or "module" per customer

Average CMRR per "product" or "module" per customer - https://bit.ly/3szISFp

But is CMRR growth everything? Let’s compare two companies with nearly identical CMRR growth curves. We’ll call them Company ABC and Company XYZ. The chart below shows that indeed, both companies are on the same CMRR trajectory.

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!

• The price of the 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