Revenue driver tree: what it is and what to do instead

The idea worth keeping

Not as boxes to fill, but as questions that fall out of the maths of the goal:

• How does this business earn: one-off sales, subscriptions, fees on volume, or advertising?
• For a subscription, what are new sign ups, cancellations and average revenue per user?
• Which driver changed, and is that change a trend or a one-off?

Why reaching for it fails in an interview

• It is generic. Customers x frequency x price fits a coffee shop, but a streaming service has no "purchases per customer".
• It misses the driver that matters. The standard tree hides churn and new sign ups, which are what slow a subscription business.
• It sounds rehearsed. Drawing price and volume before asking how the business earns sounds like a list, not an understanding.

What to do instead: a worked case

1. 1

   Pin the question

   Explain why growth fell from 20% to 5% and find the lever that restores it.

2. 2

   Write the maths of the goal

   • Revenue = average subscribers x average revenue per user (ARPU) per month x 12
   • Subscribers at year end = subscribers at start + new sign ups minus cancellations
3. 3

   Use what you know about the business

   • Subscription businesses are run on sign ups, churn (the share who cancel) and ARPU.
   • As a market fills up, sign ups slow, because most households that want the service already have one.
   • Price rises and cheaper plans with advertising change ARPU; better content and annual plans cut churn.

   The structure that falls out of it

   • New sign ups
     • Households not yet subscribing
     • Share of them who sign up each year
   • Cancellations
     • Churn rate
     • Why people cancel
   • Revenue per subscriber
     • Price by plan
     • Mix of plans

   Hypothesis: Churn has probably not changed much; I expect sign ups have slowed as the market fills.

4. 4

   Find the facts that decide it

   • Last year: 8.0 million subscribers at the start, 20% churn (1.6 million cancelled) and 3.2 million sign ups, ending at 9.6 million: growth of 20%.
   • This year: 9.6 million at the start, the same 20% churn (1.92 million) and 2.4 million sign ups, ending at 10.08 million: growth of 5%. Churn rate held; sign ups fell 25%.
   • Cutting churn from 20% to 15% would keep about 0.48 million more subscribers a year; at ARPU of 8 a month that is about 46 million of revenue a year (0.48 million x 8 x 12).
5. 5

   Say so what

   Growth slowed because sign ups fell 25% as the market fills, not because more people cancel. Growth now has to come from keeping subscribers and earning more from each: annual plans to cut churn, and a cheaper plan with advertising to raise revenue per household. The risk is that price changes raise churn, so test them in one market first.

Build the acumen behind it

The worked case used two things a list cannot give you: the five moves, and knowing how this kind of business makes money. These pages teach both.