ProfitWell has partnered with Zuora to provide its users with deep insights into their financial metrics. That said, there are few differences in the methodologies around calculating these metrics.
Cancellations and Churn
When a customer cancels their subscription, we recognize the MRR of a customer until the end of their billing cycle.
MRR won't change because of a cancelation. The customer's MRR is recognized until the end of their billing cycle.
For example, if a $100/month subscription is created with effective date 06/1/2020, MRR is $100. If the customer cancels the subscription on 06/15/2020, the MRR is still $100.
New business and Churn in the same month
When a customer signs up and churns in the same calendar month, we ignore them from your metrics entirely to not inflate new + churn.
This revenue is factored into both new MRR and Churn.
Discounts and Credits
We always subtract discounts and credits before calculating MRR, regardless of frequency.
Discounts/credits are excluded from MRR.
Generally speaking, we ignore refunds.
With the purpose of MRR being a momentum metric, we're focused on events that are recurring. If you offer a customer a one-month full refund, we don't believe that should be classified as churn, and reactivation the next month—or, in the case of a partial refund: a downgrade, and upgrade the next month. It doesn't seem actionable to include these scenarios into your metrics.
Refunds are excluded from MRR.
Subscriptions on hold
When a customer has a subscription that is on hold, we downgrade them to $0 in MRR.
MRR will be $0.
Changes in MRR as a result of suspending or resuming a subscription count toward either New Business, Expansion, Contraction, Churn, or No Change.
For example, if an account has a single subscription, and the subscription is suspended, then resuming the subscription counts toward New Business because the MRR for the Subscription Owner Account increases from 0 to a value >0.
If a customer churns and comes back within any period in time, they will be marked as a reactivation.
A customer account that has been cancelled can be re-activated, if needed.
We roll all recurring metered billing into MRR.
The MRR calculates subscription fees normalized to a monthly value, and does not include one-time or usage fees.
Our calculation is roughly ARPU/(1-Retention), but we also apply a smart smoothing algorithm on top of this.
In other words, we take a look at more than the current month ARPU and churn rate: we take a look at the whole ARPU (typically stable) and churn (usually volatile) trends, apply some magic (math, really!), and go from there.
We also think that upgrades, reactivations, and downgrades should also meaningfully impact your LTV, so instead of simply taking churn, we take 1-Retention as the denominator.
LTV = Current Recurring Revenue ($) x Gross Profit Margin x Account Retention Rate / (1 + Discount Rate – Net MRR Retention)
Free plans ($0 subscriptions)
We bundle free plans into trials.
Users on free plans/$0 subscription plans/trials are considered customers.
Endless free trials tracked in Zuora still require a subscription to be created for a $0 amount. These subscriptions also get picked up in billing runs and $0 invoices are generated.
A customer, by our definition, must be actively paying you for your product or service on a recurring basis.
As long as the customer's status is not canceled, they are still an active customer.
Accuracy is, has been, and will always be our top priority. If you have any questions, please reach out to us with an example of a customer that is either missing or reflecting inaccurate subscription activity within ProfitWell. We're happy to help get to the bottom of any discrepancies!