Q&A: Can Most Annual Subscription Revenue Really Be Booked Every Jan 1?
Question: Hi Mark, In one of the course videos for Accelerate Your Subscription Business you mention “Subscriptions make forecasting and capacity planning easy — 70% of next year’s revenue is booked on January 1”. Where did you find the stat or where did this example come from? I LOVE this quote and find myself using it a lot and wanted to understand the source. Please let me know! – N.
Answer: Hi N. First, thanks for taking the course. I’m glad it’s helpful to you.
It’s just math (and possibly a tiny bit of an exaggeration).
Calculating Your Annual Growth and Churn
You have two variables that matter when calculating your annual subscription-based revenue: annual growth and churn.
- Churn: If you win no new customers and you don’t grow customers, meaning you have no growth at all, you can churn 5.5% per month and still have 70% of the revenue for next year.
- Annual Growth: On the other hand, if you have no churn, and grow the company by 42% over the year, then 70% of the year’s revenue was due to retention. (1 divided by 1.42 = 70%)
Of course, the number will be somewhere in the middle. Probably something like 20% annual growth and 2.5% monthly churn.
You can use our free Subscription Growth Calculator to play with the numbers. I would recommend leaving the starting monthly revenue at $83,333. That’s $1M / year. Then adjust the inputs until Year 1 revenue shows $1.42M ($1M is 70% of $1.42M).
The bottom line is that in a subscription business you certainly want to grow your revenue, but if you treat your current customers right they are already next year’s revenue. That’s way easier than trying to win new business.
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.