Our ‘Beginner’s Guides’ are designed to help companies build their own successful subscription businesses. In the second part of this blog series, we look at some key metrics organisations should be monitoring while designing the perfect subscription experience. Shashank Venkat with the details
In today’s world, many traditional organisations have pivoted towards subscription billing models
, alongside newer entrants that have subscriptions at their core. While it is good to see many businesses joining the subscription revolution, the definition of success is still held hostage to some of the traditional financial metrics such as gross profit and EBITDA, among others. These traditional metrics might offer some value, but they fail to paint the complete picture. Subscription businesses need to look at more dynamic metrics that will help them make quick decisions in real-time.
Subscription metrics should be focused on developing long-term relationships with customers and building a steady stream of predictable recurring revenue. These metrics are based on your own business data and should be seen as important growth markers on your way towards subscription success.
Monthly Recurring Revenue (MRR)
Five Key Subscription Metrics
– This metric is really the sweet spot of your subscription business; the amount of predictable recurring revenue that your business earns on a monthly basis. This straightforward number paints the true story about your business over time, however there are a couple of factors that need to be considered:
MRR = SUM(revenue from recurring products ÷ billing period length in months)
- Firstly, the MRR should only include the recurring revenue, so one-off charges must be excluded as these will not be repeatable on a regular basis.
- And secondly, subscriptions that are billed on frequencies other than monthly need to be normalised in the calculation. So, for example, revenue from annual subscriptions should be divided by 12 to be included in the MRR.
Obviously, MRR should increase over time if your subscription business is doing a good job of acquiring and retaining customers. If this number flattens out or declines, then there are fundamental problems that need to be addressed. For businesses that typically sell annual subscriptions it is common to track Annual Recurring Revenue (ARR) instead of MRR.
Average Revenue Per User (ARPU)
– As the name suggests, this metric tells you the average revenue generated per user every month. It can be measured by the following formula:
ARPU = Total revenue in the period (month) ÷ Average number of paying subscribers in the period (month)
Change in ARPU from month to month is an important indicator of growth, helping to measure the success of up-sell and cross-sell promotions.
– This metric represents the total number of subscribers that were due for renewal who have cancelled their subscriptions, either voluntarily (deliberate cancellation or non-renewal) or involuntarily (missing a payment). The churn rate can be measured as:
Churn Rate = Total number of cancelled subscribers ÷ Total number of subscribers due for renewal
The important thing here is to measure churn according to your subscription’s standard renewal period. So, for annual products, it makes sense to calculate the annual churn rate, whereas for products which rollover or renew on a monthly basis, a monthly churn rate should be used.
Churn rate is a great indicator of customer loyalty and informs you how well your business is able to retain customers.
Customer Acquisition Cost (CAC)
– This is another key metric which tells you whether your business is on the right track. It tells you the average cost required to acquire each customer and takes into account the money spent on sales and marketing activities. The measurement is fairly straightforward:
CAC = Money spent on acquiring customers in the period (month) ÷ customers gained in the same period (month)
This metric is important from a sales and marketing perspective and informs you about the effectiveness of your different channels. Combined with customer lifetime value, this KPI also helps you determine the return on investment and guide key decisions about pricing.
Customer Lifetime Value (CLV)
– For any subscription business, one of the most important goals is to build a high customer lifetime value. However, many new subscription-based businesses tend to confuse revenue with revenue. To start with, you can look at the customer lifetime revenue which can be calculated as:
Customer Lifetime Revenue = ARPU x Average Subscription Length
Over time though, this metric needs to evolve to take into account other important factors such as churn and profit margin to depict value more accurately. The customer lifetime value metric provides a projection of the average total value generated by a customer during their lifecycle (from sign up to churn). One of the most accepted ways to measure it is as follows:
CLV = (ARPU x Gross Margin Percentage) ÷ Churn Rate
High customer lifetime value means that your subscription business is in good shape. It also gives you an important indication as to how much your business can afford to spend on acquiring new customers and keeping existing ones.
There are various other metrics that subscription-based businesses can look into, but the KPIs listed above should lay a solid foundation for tracking success. Cerillion Skyline
helps organisations keep a track of these core metrics and supports subscription-based businesses from start-ups to large corporations.
Don’t forget to read our first blog in the series:
A Beginner’s Guide to Subscriptions: Part 1 – Understanding the Basics
In our next blog in the series, we will examine some of the common subscription billing mistakes and how to avoid them.