Key Subscription Business Model Metrics and KPIs
At their core, key performance indicators (KPIs) should measure the value you provide customers. The KPIs for a subscription business model are slight variations of more traditional metrics. With the growing consensus that all businesses are essentially subscription businesses, more people measure success with these same metrics.
It’s important to choose the right KPIs for a subscription business to avoid missing what’s happening in your company so you can focus on growth and servicing your customers while still having your finger on the pulse.
To help you, we’ve put together a list of the subscription business model metrics that you should be following to stay informed and competitive.
Customer Acquisition Cost (CAC)
CAC is a straightforward metric that tells both you and your stakeholders if your business is viable. In the long term, you need to be spending less acquiring a customer than what you’re earning per user.
The tricky part of CAC is the actual calculation. Which costs should you include?
Essentially, your CAC should include all costs that result in a paying customer. This includes your Cost Per Lead (CPL). CPL means everything you spend on advertising, inbound marketing (digital or otherwise), and any associated expenses such as consultancy.
If you’re a startup, add in the cost of your marketing and sales teams. Payroll is sometimes kept out of CAC, but including it gets you a more robust metric. Remember too that CAC will change as your company grows. It’ll usually be lower early on, but companies tend to spend more as it becomes harder to acquire new customers.
It’s also essential to track CAC for individual channels. This is relatively easy for pay-per-click (PPC) campaigns since there are great analytics for Google, Facebook, Instagram, Twitter, and LinkedIn. But don’t forget that there are also built-in analytics services for Reddit, Quora, comparison websites, and most viable marketing channels.
When you’re calculating CAC for specific channels, consider how time factors in. For example, Reddit might be cheaper, but Facebook has a much larger audience. As a result, Facebook will use up a bigger part of your budget, but will also find you more customers faster. Niche channels could have a lower CAC, but it’ll take longer to get the same number of customers. The higher costs of bigger platforms like Facebook are unavoidable, so you basically have to accept them.
Calculating CAC is trickier for less direct campaigns and, therefore, harder to track, such as SEO, content marketing, and any branding activities. You could consider acquisition from direct and organic traffic to be an indicator. Having all these costs in the calculation gives you a more accurate overall CAC.
Monthly Recurring Revenue (MRR)
MRR is a useful snapshot metric for subscription businesses. Your monthly recurring revenue is the average revenue you earn per subscriber in a month, multiplied by the total number of subscribers. It shouldn’t include one-off revenues.
MRR is a one-step calculation if you have only one subscription plan. However, it’s possible that your business has multiple tiers. In this case, any plan longer or more expensive than a monthly plan needs to be adjusted accordingly. For a yearly plan, for example, you need to divide the revenue by 12. If you have custom plans, you’ll have to make additional adjustments.
As the term suggests, MRR shows how much revenue you can expect every month. It’s also a good metric around which to plan sales and marketing budgets, especially if you’re cash strapped.
You can extend your MRR to get your Annual Recurring Rate (ARR).
It’s important to remember that both MRR and ARR are snapshots. These metrics change based on how many subscribers you gain and lose every month or over the course of a subscription cycle.
As a result, once you know your MRR, you should track its change over time. A series of snapshots of your business revenue is far more relevant than a single snapshot.
To understand MRR growth and change, you need to break it down into additional metrics for the business you’re gaining and losing.
One such metric is increased revenue from new customers or New MRR. You can also measure increased revenue from existing customers, say if you upsell them to a more expensive plan. This is known as Expansion MRR.
A third metric is revenue lost to churn or customers you’ve lost. It’s also possible for you to lose revenue from plans being downgraded. This metric is known as Contraction MRR.
Average Revenue Per User (ARPU)
Obviously, you should be trying to increase this KPI over time. But you should also be aware of how ARPU can help you.
- Competitor comparison: ARPU is a legitimate metric that you can use to compare yourself with competitors. Many large companies report their ARPU, so look for a venture that resembles yours and has achieved sufficient scale. Stock analysts, for example, use ARPU to compare subscription-based businesses. It’s a high-level or macro metric that lets you know how well you’ve priced your product.
- Customer acquisition strategies: Benchmarking your business against a competitor also gives you the option of learning from them. For example, if your competitor has a higher ARPU, you could choose to target the same customer acquisition channels as they do to increase your metric.
- Profitability analysis: If you have tiered plans, you can calculate your ARPU for each customer segment. Comparing it with the cost of acquisition or cost of support will tell you just how valuable each customer segment is for you.
In addition, you can monitor a separate ARPU for new subscribers. This metric will show how your business or service is currently valued by the market. If new users are willing to pay more, it probably means that your business value is increasing.
Churn is inevitable, especially for subscription businesses. Churn tells you how many customers you’re losing and how much revenue your business has lost over any meaningful time period.
Keeping an eye on churn is essential because it costs more to acquire a new customer than to retain one. A good e-commerce platform will have features to help you reduce churn and lower your overall costs.
Customer churn will tell you how many of your original customers (at a point in time) have unsubscribed. For example, say you had 1,000 subscribers at the beginning of last year. Now, after a year, 100 of these 1,000 users are no longer customers. This means your churn over the year is 100/1000, and your churn rate is 10%.
The opposite of your churn rate is your retention rate, therefore 90% in this example.
There are two types of churn: voluntary and involuntary. You should be more focused on voluntary churn as this reflects a customer decision. An example could be a customer who chooses to leave, say, due to an increase in price. The right analytics tool will help you measure this.
You can help with involuntary churn depending on the cause. If it’s payment issues, for example, improving your customer service team will ensure the users stay on. Or if it’s because users forget to activate a monthly or yearly subscription, you can automate reminders to address the issue.
Lifetime Value (LTV)
CAC only becomes meaningful in context when you know how much a customer is bringing to your business. Lifetime value (LTV) is especially important for subscription businesses since your job doesn’t end with acquiring a customer. You need to be able to keep the customer and maybe even use them as referral sources.
If you’ve been in operation for a while, lifetime value can be seen as how much the average customer earns you from the day they sign up to the day they stop the subscription.
Of course, the simplest way to actually calculate this would be to use historical data on total earnings from each customer. For this, you can use ARPU. Divide it by your churn rate, and you have LTV. This means you should have been in business for some time to get an accurate LTV metric.
The process is a bit more complicated when you’re a startup—in fact, it’s usually not a good idea to calculate LTV if your business is still young due to the lack of data.
An alternative metric to LTV is Payback Period. This is the average time it takes for your business to earn back (as MRR) the cost of acquisition (CAC).
You can also break down LTV for each channel. Not all channels yield leads of the same quality, and high conversions don’t mean much if the LTV is low. You can filter out the channels that are working best for you and double down to get the best quality leads.
LTV and CAC together give you a good estimate of your Return on Investment or ROI. Just divide the average lifetime value a subscriber brings by the average cost of acquiring one to know how much money you’re making (or losing) for every dollar you spend.
To stay competitive, you need to be methodical about monitoring your KPIs. You need to set up your analytical tools to make it as easy as possible to do this, and you need a platform that integrates them all with your workflow.
Subbly is an all-in-one solution for running your subscription business. From building your website through marketing and analytics to shipping and logistics, we make it simpler and easier to start and grow your company.
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