This is why I count myself very lucky to have worked so closely with @allspaw – I have watched him explain EBITDA to other engineers as a competitive advantage as important as continuous delivery (he called it "deployment" back then but whatever) https://t.co/M10nSDFhPz
— Kristina Salen (@SalenKristina) November 28, 2017
What’s a CTO doing taking about EBITDA? Wait, what’s EBITDA?
Senior Engineering leaders (well, really VPE+) are expected to understand the business in their role. There’s a plethora of sales, marketing, customer success, and financial jargon (with accompanying acronyms) that you’re suddenly exposed to. I wanted to take a few minutes of your time to explain some of these words, their meanings, and why they are important.
Come to think of it. Even if you’re not an engineering leader these are good to know pulses for the business you work in.
ARR – Annually Recurring Revenue
Why? This number tells you how much revenue the company pulls in on an annual basis, based on yearly subscriptions. MRR (monthly recurring revenue) is also often used.
How? Total Subscription Income Per Year + Recurring Revenue From Add-ons or Upgrades – Revenue Lost from Cancellations
Target? Bigger is better
CAC – Customer Acquisition Cost
Why? How much is the company spending to sign a new customer.
How? Add up all the spend on marketing in a given period and divide by the number of customer acquired in that period.
Target? Smaller is better
LTV – Lifetime Term Value
Why? This metric lets you know how much revenue you can expect from a customer while they remain a customer
How? Calculate average purchase price and multiply by the number of times they purchase (e.g. subscription renewal).
Target? Bigger is better.
LTV/CAC Ratio
Why? This compares the lifetime value of a customer to the cost of bringing them onboard. It lets you know if you’re spending way too much to acquire customers and if your current strategy is sustainable.
How? LTV/CAC
Target? A LTV/CAC ratio less than 1.0 means the company is destroying value. If the ratio is greater than 1.0 it may be creating value. A general rule of thumb is that ratio greater than 3.0 is considered “good”.
Net Monthly Recurring Revenue Growth
Why? This simple metric measures the month over month percentage increase in net MRR. As new revenue is added and customers churn (cancel) and as accounts expand or contract, the net MRR growth rate shows the net variation of all these.
How? Net MRR (this month) – Net MRR (previous month) / Net MRR (previous month)
Target? Companies should aim to hit a sustainable ratio of 3.5-4x more added MRR
ARPA (or ARPU, in the telecoms days) – Average Revenue Per Account
Why? Lets you know how much each account is generating and can be used in combination with predicted sales to give you an indication for future income.
How? ARR / number of accounts (for an annual basis, or use MRR for monthly)
Target? Bigger is better
EBITDA – Earnings Before Interest, Taxes, Depreciation, and Amortization
Why? EBITDA focuses on operating profitability and cash flow. It can be seen as a proxy for cash flow from across the company’s operations. This is the financial core of your business.
How? EBITDA = Net Income + Taxes + Interest Expense + Depreciation + Amortization
Target? It’s common to measure the EBITDA Margin which is EBITDA / Revenue. A low EBITDA margin indicates that the business has profitability problems. A high EBITDA margin means the business’s earnings are stable (because its operating expenses must be lower in relation to its revenue).