Subscription Growth Calculator
We recently released the Subscription Growth Calculator, an excel file to help you determine how to grow your subscription-based business. As you’ve heard us say hundreds of times, subscription businesses must manage three revenue buckets: acquisition, retention, and expansion. This calculator allows you to make assumptions about how well you will do managing these 3 buckets and calculates your annual revenue for the next 5 years based on those assumptions.
This powerful tool will show you and your team the importance of all 3 revenue buckets in meeting your revenue goals.
How to use the SGC
The easiest way to use the Subscription Growth Calculator (SGC) is to only change the fields in the white boxes on the left of the spreadsheet. We have left everything unlocked so you can see and change anything you’d like, but only changing the cells on the left provides fantastic insight.
The cells in gray on the left provide a summary of the annual revenue and the percent of growth for that year that came from Net Dollar Retention (NDR). In other words, how much do you need to focus on expansion?
Start by entering a few initial assumptions:
- Starting monthly revenue: The revenue from the month before the model begins. For simplicity assume that is December of the previous year.
- Starting number of subscribers: The total number of subscribers you had in December.
- Number of new subscribers first month: The number of subscribers you believe you will win in January of the first year of the model.
These three assumptions simply start the model. It is best to be as close to possible with your actual numbers.
Once you have the initial assumptions, now you get to play with the future. The four columns below the initial assumptions give you control over the future (in the model, not real life).
These are the four key manipulations you get to make:
- Sales growth rate (monthly): How many more new customers do you think sales will win in February compared to January? Don’t worry about seasonality. This is an average. If you really want to be accurate, you can click on the plus sign above Year 1 in column W which allows you to change the monthly numbers. However, we advise you to be easy on yourself. Just use the boxes on the left of the screen. You’ll notice if you change year 1, all of the years change too. You can enter different numbers in different years if you’d prefer.
- Average Revenue Per New Subscriber (ARPNS): When someone first signs up, how much do they pay you per month. You’re looking for the average.
- MRR Churn rate: Of the revenue you got last month, how much of that will you lose this month because some subscribers didn’t renew?
- Monthly Expansion Rate: Of the subscribers who were with you last month, on average how much more will they pay you this month?
Pro Tip: The calculator lets you see and edit every cell, but it works best when you only change the fields in the leftmost section.
If you dig into the details, which you don’t have to, you will find the spreadsheet calculates monthly, but uses annual cohorts. Every customer as of Dec 31 is in the cohort for the following year. Some customers will churn out, while some will buy more (expand).
At the end of the year, you can see the Net Dollar Retention (NDR) rate. This is how much you sold through the year relative to if the cohort had zero churn and zero expansion.
Did you know that in their S-1 filing for going public, Zoom reported a 140% NDR?
Once you know where your growth will come from, what should you do?
The purpose of the SGC is to give you a tool to play with acquisition, churn, and expansion rates to determine how you can best and realistically get to your long term goal. OK, we really put it together to help you realize you can’t get where you want to go without expansion, probably lots of it. If your NDR is above 100%, you need to implement strategies and tactics targeting expansion.
Pricing is hard and important in both acquisition and retention, but it becomes especially crucial and challenging once you decide to focus on expansion. You may need to segment your market and raise prices on the high-value segments. You’ll definitely want to get your pricing metric right so that as the customer gets more value they pay more. Finally, you will want to offer different packages at different prices. Good, better, best is a powerful strategy to capture more of the value you deliver to each customer. If you want help learning more about value, pricing and packaging, please reach out to us.
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.