14 CHAMPION GUIDES 4. Net dollar retention (NDR). Sometimes referred to as net revenue retention (NRR), this metric looks at what percent of the business has been retained and expanded. With consumption, it speaks to whether customers are receiving value and continuing to use the solution. NDR is calculated with a simple ratio of [revenue in the current 12 months] divided by [revenue in the prior 12 months]. 5. Active customer accounts. Growth in the number of active customers, coupled with expansion of your NDR, represents a powerful combination for your valuation. Consumption allows customers to increase or decrease their use of the solution without requiring changes to their contract. That’s why growth and diversity in your active account base, coupled with a predictable and growing NDR, will give you confidence in the health of your business and the likelihood of achieving your forecasts. While spreadsheets might work for managing subscription metrics, they cannot handle the variable nature of consumption pricing. To run a consumption pricing model and deliver up-to-date forecasts on a daily basis, organizations need to invest in data science, systems, and people. • Data science. Consumption forecasting requires you to predict customer usage patterns. To manage these types of complex financial calculations, you need data science powered by real-time data. Data scientists should be hired and embedded in your finance team as functional experts. They are instrumental for building dynamic models that deliver immediate feedback to enrich your forecasts. By modeling data over time and continuously updating models, data scientists can deliver crucial input on how revenue is tracking and evolving, which allows you to make real-time adjustments and be proactive. They also empower you to understand customer-level forecasting on a daily basis. You can track margins and deliver real-time insights into customer data around revenue and cost-of-delivery. All of this helps inject predictability into your financial metrics. • Systems and tooling. Transparency is the hallmark of a consumption-based pricing model. That makes systems and technology one of the biggest challenges you face when implementing consumption-based pricing. Metering and billing capabilities must be sophisticated enough to handle the operational complexities associated with consumption pricing and to track usage at the individual customer level. A modern data platform provides a central source of truth for tracking data from divergent systems that inform billing. Customers must be able to view usage, understand the bill, and trust that everything is accurate. You’ll need this same transparency and accuracy of usage data to correctly compensate your sales reps. • Collaboration. Under a consumption model, it’s crucial to develop and maintain a close cross- functional relationship between product, sales, finance, and operations. These teams directly impact the product, how it performs, how customers consume it, and what new features and functionality need to be considered. To promote alignment, maintain a set of data models related to bookings, revenue, costs, and other financial data sets that other teams can consume. This shared analysis enables everyone to work from the same assumptions and speak a common language, which results in deeper collaboration and better decision-making. 14 RETHINKING REVENUE: FIVE TAKEAWAYS 1. When forecasting revenue, remember that consumption is rife with variability and requires both quantitative data and qualitative inputs to account for unique customer behavior. 2. The five metrics commonly used with consumption-based pricing are revenue, RPOs, cash flow, NDR, and active customer accounts. 3. Data scientists are a critical addition to any finance team if you want to forecast revenue and report financial metrics with speed and accuracy. 4. Metering and billing capabilities represent a large hurdle you must clear in order to implement a consumption-based pricing model. 5. Clear and consistent cross-team collaboration and communication is required to adjust forecasts in response to product and performance improvements.
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