Square (SQ 0.73%) might have started out as a way for small businesses to process card payments, but it's grown to offer an entire suite of business services to companies of all sizes. Square's ecosystem has become integral to the company's ability to attract and retain merchants and grow its business.

While the company provides an update every quarter on how much its software and services businesses generate in sales, there're still a few details missing from a raw revenue number. If investors want to see the real health of its ecosystem strategy, the best number to look at is what Instinet analyst Dan Dolev calls "adjusted revenue yield." He calculates the metric by dividing adjusted revenue by total payment volume.

Last quarter that number (excluding revenue from the company's Zesty and Weebly acquisitions) was 1.89%. That compares to 1.4% two years ago, as Dolev points out.

Person inserting credit card into Square Terminal.

Image source: Square

Why this metric captures everything

Square CEO Jack Dorsey described the company's ecosystem of services as its "core differentiator" on the company's fourth quarter earnings call. "We are an ecosystem of financial tools for both individuals and sellers, and we continue to prove the power and the uniqueness of that as time goes on," he told analysts.

For the ecosystem to work as a way of attracting and retaining merchants, however, merchants need to be using multiple services from Square. It's not enough for some merchants to use one tool and others to use another. A growing "adjusted revenue yield" is a strong indicator of more merchants taking multiple products.

It's important to understand that Square often uses pricing as a lever to encourage merchants to take multiple products. Square might offer larger merchants a discount on its standard 2.75% payment processing fee if they also use Appointments or Payroll, for example. Looking at adjusted revenue over gross payment volume shows the value Square creates by offering better pricing to merchants taking multiple products.

As Square continues to roll out new products like the Square Card and revamps old ones like Online Store, investors should see adjusted revenue yield continue to climb. That could be a better indication of management's execution than simply looking at growth in adjusted revenue or payments volume in itself.

It's also more telling than looking at Square's take rate on payments, which could decline as it incentivizes more merchants to take multiple products with better pricing on payment processing. In fact, Square stopped explicitly providing its transaction-based margins in its latest letter to shareholders (although investors can still calculate them themselves).

Okay, maybe it doesn't capture everything

While Square primarily generates revenue from merchants, it has a growing consumer business with Cash App, its peer-to-peer payments app. Management started calling out the Cash Card, a prepaid debit card linked to a user's Cash App account, as a significant source of revenue growth for the company.

As Square expands into more consumer services, Cash App could become a meaningful source of revenue that's almost entirely disconnected from its merchant services. Revenue from Cash Card transactions has little overlap with Square's core business. That makes adjusted revenue yield a slightly less accurate barometer for the health of Square's ecosystem strategy.

If Cash App becomes a meaningful source of adjusted revenue, management may break out results for investors -- if not in its official quarterly report, it might offer commentary in its earnings calls. For now, Cash App and consumer services remain relatively small sources of revenue compared to Square's merchant services.

As Square's ecosystem grows, Dolev's idea of adjusted revenue yield is the best metric for investors to watch to judge management's performance. Investors can't be too unhappy if the growth of revenue from Cash App makes the number slightly inaccurate.