If you do business in the cloud, the start of a new year is an excellent time to review the law, called the 5Cs of Cloud Finance, which lists the essential top-level performance indicators for businesses:
- CMRR, ARR & ARRR: Committed monthly recurring revenue, annual recurring revenue, and annual run rate revenue. In its report on the 10 laws of Cloud Computing, Bessemer Venture Partrners noted that, “Many leading cloud companies…use CMRR as the basis for everything from the financial model to the sales commission plan. This is the single most important metric for a cloud business to monitor as the change in CMRR provides the clearest visibility into the health of any cloud business.”
- Cash Flow. As their 2012 report pointed out, CMRR provides a good sense for the revenue health of your business, but is often disconnected from the so-called “cash health” of a company. Since cash management is critical to a business’s survival, you need detailed cash metrics.
- CAC: Customer acquisition cost payback period. This is a statement, in months, of the time to fully pay back your investment in sales and marketing. In other words, it helps you determine the “profitability” of these efforts.
- CLTV: Customer lifetime value. Bessemer defines this metric as the “net present value of the recurring profit streams of a given customer less the acquisition cost.” It’s critical to understand each customer’s lifetime value, because a profitable business is built on profitable customers.
- Churn and renewal rates: It’s extremely difficult and costly to grow your subscription business if you have moderate or high customer churn. Thus, according to Bessemer, the single biggest driver of long-term profitability for your cloud business (and thus valuation) is the renewal rate of your customers.