Menu
Grow Your Subscription Business
Win Keep Grow Figures
Impactful Insight From Mark
Chapter 7 from WIN KEEP GROW
Subscription Growth Calculator
By now, you know subscription companies have three revenue buckets: WIN, KEEP, and GROW. Although each one requires different tactics to improve, you have to manage each bucket separately — this is the challenge. You can’t do everything all the time. You have to allocate finite resources across the three buckets.
Additionally, you learned that you should focus on acquisition and retention revenue in the early stages of your subscription business. In the later stages, you should put more focus on expansion revenue. How do you decide what to do when? How do you prioritize?
The Subscription Growth Calculator (SGC) helps you answer these questions. Although the SGC doesn’t tell you which resources to invest in each bucket, it does help you plan how much revenue you need each bucket to produce to reach your goals.
Using the Calculator
The SGC tool is built-in Microsoft Excel. Download a copy for your personal use from SGC.impactpricing.com. I have left all of the cells unlocked and visible so you can see every formula and assumption. You can edit them if your situation is different. And, if you completely mess the file up, just download a clean version. However, before changing any formulas, play with it the way it was intended. Only change the cells that are assumptions.
Step 1 is to set your initial assumptions in these three cells:
You want to put in your real numbers. In our example we chose $83,333 monthly revenue because 12 * $83,333 is $1M in annual revenue. Do you remember the Bessemer Venture numbers in chapter 6? They found “Good” companies went from $1M to $10M in four years. We will see what it takes to make that happen, so we start at $1M.
Assume monthly revenue is for December. Starting # of subscribers then is the number of subscribers as of the end of December. The # of new subscribers in the first month is how many new customers you think you will win in January.
Step 2 is to articulate your revenue goal.
In this example, we are going to use the goal of $10M in four years. There is no place on the spreadsheet to enter it, but you can play with the yearly assumptions to see how you might hit your goal. In the figure below, you can see revenue for Year four is $10,595. If you said you wanted $30M in five years, you would look at the revenue for year five, see it is well below the goal and would need to adjust some assumptions to get the number toward your goal.
Step 3 is to tweak your yearly assumptions until the revenue shows your goal.
All of the numbers here represent monthly data, but they are called yearly assumptions because the number can’t change in the middle of the year (for the simplicity of the spreadsheet). Here is what this means:
• We will win 3% more new customers each month than we did the month before
• Each new customer will pay us an average of $40
• Our churn rate is 1% per month
• For a cohort of subscribers, each month, they will pay us 6% more (due to price increases, usage, upsell, and cross-sell).
At first, only change the cells in yellow. This will also change all the cells below them. However, if you want to see what happens if you shifted more resources into expansion over time, you could enter values anywhere on this table.
Step 4 is to interpret the results.
We now look at the resulting numbers and ask if this is feasible. Can we win 3% more customers each month? We might have to invest more in sales and marketing to make it happen. Can we achieve $40 ARPNS? Maybe we need to change pricing or the product packaging. Is -1% churn rate reasonable, or do we need to invest more in onboarding and customer success? Can we get customers to pay us 6% more on average each month? Maybe we need to rethink our pricing metrics, our upsell packaging or create some cross-sell products. These yearly assumption numbers are what you need to hit to reach your overall goal.
Let’s look at the summary of the results once again. Notice the amount of growth coming from acquisition decreases as a percentage of your business. This is an indicator of acquisition becoming less critical as you grow.
What if you have a set of yearly assumptions that gives you the growth results you want, but you don’t believe you can meet those objectives? Keep playing. Just for fun, I created another set of yearly assumptions that also got us to $10M by year four. Notice we started with a heavy emphasis on acquisition growth and little focus on expansion. Over the years, those two positions switched.
Which set of yearly assumptions do you think are more achievable for your product or company? This is the spreadsheet’s whole point — to figure out how you will reach your overall revenue goal.
Metrics
Earlier in the book, we described various metrics. You see many of them in the section on the right side of the SGC.
Here is one more example with a fascinating insight. I set the monthly expansion rate to 0%, meaning there is no expansion revenue (the GROW bucket). We set a modest churn rate of -1% per month. Then, we played with the sales growth rate to get to $10M in revenue in year 4. This requires 10.5% per month growth, which works out to 231% growth per year. This means you have to more than triple your new customer acquisition every year to reach your goal — a very challenging target. Here is one conclusion I hope you take away from this: to have a fast growth rate, you MUST create pricing and packaging that encourages customers to buy more from you.
Of particular interest are the three revenue buckets. They are calculated and labeled: acquisition, retention, and expansion. These three revenue buckets are what you are measuring and managing; the sum of them makes up your overall revenue.
The SGC does have limitations: for example, anyone who subscribes during the year is counted as acquisition revenue for the remainder of that year. We also assume none of them churn out or buy more during the year they initially subscribe. The following year, they become part of the cohort we use to estimate retention and expansion revenue.
Let’s take a closer look at Net Dollar Retention. As you can see in the metrics displayed above, the initial assumptions resulted in a calculated 139% NDR. That is pretty close to Zoom’s NDR of 142%. Here’s a hint as you play with the spreadsheet: to achieve this NDR, your MRR churn rate and your monthly expansion rate need to total 5%. For example, 6% + -1% = 5%. If your churn were 0%, an expansion rate of 5% would give you the same results.
The Subscription Growth Calculator (SGC) was created to help you achieve your growth goals by identifying and prioritizing which revenue buckets you should focus on at any given time.
The Subscription Growth Calculator
You’ll gain valuable insight when you try our proprietary Subscription Growth Calculator at no cost. This powerful tool helps you determine how to grow your company through each key revenue bucket: acquisition, retention, and expansion.
You’ll start by inputting some basic assumptions about your company, such as starting monthly revenue, starting number of subscribers and the number of new subscribers per month. Then enter your expected performance in sales growth rate, churn rate, and expansion rate and read your projected revenue. Finally, tweak the expected performance assumptions until the projected revenue matches your revenue goal. This tells you how much you need to focus on each of the three revenue buckets to reach your goal.
READY TO TRY IT?
Simply input your email address below and you’ll get access to an Excel version of the calculator.
About Mark
Mark is a pricing expert who helps companies understand value, how to create it, communicate it and capture it.
He has a PhD from U.C. Berkeley and an MBA from Santa Clara University, plus 25+ years pricing experience. As an educator, speaker and coach, Mark applies innovative, value-based pricing strategies to guide growth and increase profits for large and small companies.
