As nearly every company aspires to have recurring revenue business model, investors and analysts are increasingly focused on two “magic number” metrics: ARR/CAC and NRR. More importantly, every Sales & Marketing executive and employee should be fully aware of these numbers.
- Customer Acquisition Payback (ARR/CAC): Customer acquisition effectiveness is increasingly being measured by expected Annual Recurring Revenue (ARR) divided by Customer Acquisition Cost (CAC). For many companies, just exceeding a ratio of ARR/CAC greater than 1.0 is a victory. What proponents of a > 1.0 ARR/CAC assert is that “this company is willing to spend every dollar of 1st year revenues to acquire a new customer.” Why? Because if a company truly has a recurring revenue model with acceptable gross margins, retaining that customer through years 2-5 is a profit machine.
- Net Customer Retention (NCR): Customer retention effectiveness is a combination of YoY customer renewal rates plus cross-sell driven share-of-wallet increases – and it must be over 100%. Most companies consider annual renewal rates of >80% to be successful. A natural 20% attrition can be expected due to changes in decision-makers, financial priorities, and individual/corporate “death.” But to offset natural attrition, companies must not only provide great service but also cross-sell other products and services to increase share-of-wallet within 80% of customers renewing each year. A >100% NCR eliminates the “leaky bucket” that can drain a company’s YoY revenue base.
The two magic numbers are fairly easy to calculate – but a lot harder to achieve and sustain. The three questions every CEO and Chief Sales & Marketing Officer need to answer are:
- How are we performing vs. these two “magic numbers”?
- What operational levers can we pull to drive improvement?
- What investments in scalable technology are we making to accelerate performance?
More on these questions in future blog posts.