Epsi Dispatch

ARR, CAC and more magic for business

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Arrr, Ahoy 👋
Avast! The Epsi newsletter is sailing in! Just a friendly reminder that we're here to share some valuable insights on running an online business. We've been quietly spreading our financial magic in the Shopify community, supporting developers and agencies for nearly two years. But it’s time to make some noise and spread the word far and wide!

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In our last letter, we talked about valuation and what it means for your business. Today, we're gonna dive into the different metrics you need to understand how your project is growing. Different metrics, different aspects of your business. If you know them, you can spot the potential for growth and make your business thrive and turn a profit, savvy? The worth of your business is influenced by the market, so investors, analysts and other stakeholders use these metrics to measure how you’re performing.
Now, let's break down the five most sought-after metrics for business valuation, based on your own needs, as well as your partners' or investors' needs.
Annual Recurring Revenue (ARR) represents the predictable and recurring revenue a SaaS company generates over a span of 12 months. It focuses on the subscription-based nature of SaaS businesses, giving you insights into revenue stability and growth potential. A higher ARR means a more valuable business, showing you have a strong customer base and consistent revenue streams.
To calculate it, you need to use this simple formula: ARR = (Sum of subscription revenue for the year + recurring revenue from add-ons and upgrades) – revenue lost from cancellations and downgrades that year. Remember, anything you get from add-ons or upgrades must be factored into the annual subscription revenue of a customer.
Customer Acquisition Cost (CAC) is all about the money you spend to acquire each new customer for your company. This metric is crucial to assess the efficiency of your sales and marketing efforts. A lower CAC usually means you have an effective customer acquisition strategy, which can lead to higher valuation. Plus, a low CAC helps you get a healthier return on investment (ROI) and long-term profitability.
Formula to calculate CAC = Cost of Sales and Marketing ÷ the Number of New Customers Acquired. Remember, a business becomes profitable and scalable once you manage to expand the customer base while keeping that CAC as low as possible.
Churn Rate is the percentage of customers who are jumping ship and canceling their subscriptions within a given time period. It tells you how satisfied your customers are and how well you’ve been retaining them. SaaS companies with a low churn rate have higher valuations since they prove their ability to keep hold of their customers for the long haul. A low churn rate is a sign that your product or service is valuable and satisfying your customers' needs.
Easy to calculate: Churn Rate = (Lost Customers ÷ Total Customers at the Start of Time Period) x 100. For example, if you had 500 customers at the start of the month and lost 20 by the end, you divide 20 by 500, and you get 0.04.
Gross Profit Margin (GPM) is a measure of how profitable your SaaS company is. It calculates the difference between revenue you are earning from subscriptions and the cost of providing your service. A higher GPM means you’re managing your costs well and running a tight ship. SaaS companies with high GPM tend to have higher valuations, showing they are bringing in the cash while maintaining a healthy profit.
To calculate it: GPM = (Revenue – Cost of Goods Sold) / Revenue x 100. This is telling you the percentage of revenue you are retaining after deducting all your expenses. It shows how successful you are at generating revenue while keeping expenses low.
Annual Contract Value (ACV) is all about the average value ye be getting from each customer's annual contract or subscription. It is a handy metric to gauge the revenue potential of your SaaS company by looking at the value you’re generating from individual customers. A higher ACV is a sign of a scalable business model and the ability to bring in significant revenue from each customer. SaaS companies with higher ACV often fetch higher valuations.
To calculate it: ACV = (Total contract value – one-time fees) / total years in contract. This is giving you a glimpse of how much money you are collecting each year from your customers, taking into account the pricing strategy you’re following.
Lastly, having an individual approach to each customer is a real treasure for your business. It ain't exactly a metric, but it is crucial! Understanding your customers, addressing their unique needs, and building strong relationships is key to keeping them loyal. This personal touch can have a positive impact on your business's valuation by improving customer retention and fostering that sense of loyalty that is worth more than gold.
Check our Blog here!SO WHAT'S NEXT?
Arr, we hope that this letter gives you a taste of the most important business metrics you need to keep an eye on. If you are looking to value your business, our crew at Epsi will lend you a hand. You can simply check our App and we'll be sure to get in touch with you and provide you the assistance you’ll need. We will be having some impressive projects, and you can find more information about them in the links down below. Take a plunge and see what Epsi is up to!
Fair winds and smooth sailing,
Epsi Team
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