4 basic metrics you need to track to start estimating your growth
Ever wondered what is needed to bring an additional $10,000 to your MRR? Here is how you can break it down.
The first thing you need to know is ARPA – Average Revenue Per Account.
Let's say you have two plans. Starter costs $50 and Professional costs $79 per month. You have 35 paying customers on Starter and 15 customers on Professional.
Here is how you calculate your ARPA:
($50*35 + $79*15) / (35 + 15) = $58.7
Here is a general formula:
ARPA = MRR / Number of Customers
OK. $58.7 is your average revenue per account.
The second thing you have to figure out is the conversion rate to paying customers. Your business has a web page. Visitors can find your web page and register for a trial. The question is from all the trials registered this month what % became paying customers?
If this month you had 120 new trials and 12 started to pay you, your conversion rate is 10%. (7-10% Conversion Rate from trial to paying customer is good for B2B companies)
OK. Your ARPA is $58.7 and Conversion Rate is 10%. Now, how many trials do you need to add $10,000 to your MRR?
The MRR you are getting each month can be calculated as:
MRR = Number of Trials * Convert Rate * ARPA
Extracting Number of Trials from above will give you:
Number of Trials = New MRR goal / (ARPA * Conversion Rate)
In our example:
$10,000 / $58.7 * 10% = 1703 new trials needed.
It is important to note, we assume your conversion rate won't drop while you scale. It may be a difficult thing to do. Once you start to get to a bigger number of trials the quality of your trials will deteriorate and that will lower your conversion rate.
How much time will it take you?
How much time will it actually take you to generate 1703 trials that in result will bring $10,000 in MRR? This is a good question to ask.
To understand that you need to know two additional numbers. First, number of new trials per month and second what is new trials month over month growth.
Let's say in the month of January you had 120 trials, February – 132, March – 145. As you can see we have 10% month over month growth.
If now is the 1st of March, with 10% month over month growth how many months do you need to reach 1703 new trials?
Here is the formula you can use to understand how many trials you will have in an N month from now:
Number of Trials in Starting Month * (1 + MoM Growth) ^ N
Using the formula above you can project how many trials you will be generating across the next months. Applying your 10% conversion rate to paying customers – you can see what will be added to MRR.
Here is the result for our example:
If we start from 145 new trials with 10% growth it will take us 9 months to reach 1724 new trials in total. 9 months to get this additional $10,000 into your MRR.
Wanna shorten this timeframe? You can start charging more and by doing that increase your ARPA. You can increase the number of trials you generate on a monthly basis or your conversion rate.
I know this model is simplistic and does not take into account many factors. But it is a good place to get you started.
You can use our Growth Estimation calculator to play with different variables of the model and see how it impacts the result.