*This post was inspired by Tomasz Tunguz's post A New Way To Calculate a SaaS Companies Efficiency
Recurring revenue is an incredibly powerful way to build a business. For recurring revenue businesses, the goal is to retain that revenue as much and efficiently as possible. We have discussed this in other blog posts, but this is why understanding your retention margins is crucially important to then uncover how efficient you are at renewing that revenue stream. Our initial inspiration for this was the Tomasz Tunguz's post which we referenced above, only we give it a slight twist calling it, Cost Per Retention Revenue Dollar.
First, let's introduce you to the formula:
CRPD = (Cost of Acquisition / Annual Net Revenue Retention + Cost to Serve +Cost of Success) / Retention Profit
CRPD is meant to measure the efficiency in which a recurring revenue or SaaS startup is at generating $1 of recurring retention profit. Let's get into how this metric differs from traditional customer based unit economics like LTV/CAC ratio and CAC Payback.
Let's take a company with a CAC of $700, ACV of $2,400, 60% Net Revenue Retention, Retention Margins of 65% and an average service and success cost of $700 (this is all looked at on an annual basis). CAC Payback is 4 months which typically is typically looked at as a positive timeline. But if we look at the efficiency of that revenue stream, or a Cost Per Recurring Retention Profit Dollar of $1.20, meaning that in order to generate $1 of Retention profit, this company needs to spend $1.20 which is obviously not sustainable long term.
Now let's take a look at a second company with a CAC of $1,000, ACV of $4,000, 88% Net Revenue Retention, Retention Margins of 73% and service and success cost of $800 per customer. CAC Payback is the same at 4 months, so typically we would assume that the financial performance of these two companies are similar. But when we look to calculate this company's CRPD, we get $0.88. Meaning despite similar CAC Payback periods, this company is far more efficient on a dollar basis, of maintaining their recurring revenue stream.
For most startups, it's unrealistic to expect a CRPD for your entire company. But if you segment your customers out, can we find customer segments that have a positive CRPD. Finding that segment can help unlock a whole manner of things for a startup, it can help identify product-market fit, it can help uncover operational growth levers, and it can help you affect positive unit economics for your business.
Once you calculate all of the supporting metrics and plug them into the formula for CRPD you will be able to adjust metrics around where you think you might be able to make improvements to your business. Can you increase sales efficiency and lower CAC, and what does that do for your dollar efficiency? Maybe launching a new feature or product improves net revenue retention which helps drive an increase in efficiency. CRPD is an incredibly powerful tool to not only understand the efficiency of your recurring revenue business, but to also help founders and their teams figure out how to scale.