THE REVENUE TREE

Drivers of recurring revenue

Annual recurring revenue = retained customer revenue + expansion revenue + new customer revenue

For every recurring revenue business, we are trying to maximise retained revenue, expansion revenue and new customer revenue. However, the underlying drivers of recurring revenue will vary considerably by business, as it depends on their monetisation model. The mix of focus between retention, expansion and new logos will also evolve over time as a company grows i.e. focus will shift from new logo acquisition towards retention, cross-sell and up-sell as the retained revenue base gets larger relative to new customer revenue.

To get a handle on this complexity, we can leverage an analytical tool called ‘revenue tree analysis’ which breaks revenue down into its constituent parts. This allows you to identify the drivers of revenue for your business at any one time. It’s a useful tool to both drive transparency into your growth levers and to help drive alignment across leadership over where best to focus.

Example

The approach is best demonstrated with a simple example. Let’s assume a SaaS platform sells a suite of three modules to its customers, all of which can be purchased by a single customer on a per-user basis. We would start our analysis with recurring revenue at the top of the tree, and then iteratively split the revenue components all the way down to a price per user and module. The structure of the tree provides insight in and of itself, but overlaying the financials provides additional rich insight into the magnitude of potential improvements a specific lever can have on recurring revenue.

In the simple example above, the business may discover low cross-sell of modules by account, but healthy user adoption once the module has been purchased. This should focus the minds of the leadership team on how to increase cross-selling Bundling and incentives are two monetisation tactics which could support this objective.

This exercise will also highlight the need for follow-on analyses, for example looking at the distribution of module purchases across certain types of customer (size, industry etc.); rather than just examining averages or the nature of the median client. Try to identify commonalities between those customers that buy all three vs. those that just buy one.

Prioritising profit levers

Once you have visibility of your levers of growth, it will become much easier to achieve alignment across the business over where to focus, why and how.

Monitoring, reporting, the application of incentives, marketing campaigns and sales enablement activities can then be built around the key revenue levers to ensure the business is investing its resources in activities which will generate the best return.

This gets to the heart of monetisation’s objective of continuously improving the efficiency of revenue growth by focusing on the right levers with the right metrics. As the metrics improve over time, so the focus can then shift onto other levers of growth and their associated metrics.
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