Subscription Business Model Metrics

What are subscription metrics, and why are they so important for subscription-first businesses?

Whatever stage you’re at as a subscription business owner, it’s essential that you’ve got a solid understanding of how to work with metrics. However, doing this effectively doesn’t mean tracking everything, all the time! Rather, it’s about developing an awareness of which metrics are actually the most important, and focusing on those as the levers that drive your business.

Data is proof, and the more of it you have, the more you’ll be able to justify your decisions to customers, potential investors, your team… and yourself! Nothing builds confidence better than results that you can actually back up with evidence.

There’s hundreds of different metrics you can track, from Monthly Recurring Revenue (MRR) to your monthly website traffic, but nobody needs to measure all of them. The most important thing you can do is track goals that relate specifically to your business goals — which are different for subscription-first businesses and transactional businesses — and treat the rest as ‘noise’ to be filtered out. 

This guide will make it clear which metrics you need to prioritize as a subscription-first entrepreneur, why you need to prioritize them, and how to approach them – whatever your model!

An introduction to subscription metrics and KPIs

So how do you decide which metrics to focus on as a business? The main thing to remember is that subscription-first businesses and transactional businesses have different long-term goals, and so your approach to tracking metrics should reflect that.

In a nutshell, the difference between the approach to metrics taken by transactional and subscription-first businesses is that the former tend to focus on metrics related to bottom line business growth, while the latter focus on metrics related to the customer and the customer experience.

Many subscription-first businesses focus on metrics such as Monthly Recurring Revenue (MRR), Customer Lifetime Value (CLV), Payback Period (PVP), and churn – basically, all metrics that are impacted by what happens from the moment a customer signs up and begins to engage with your brand.

Monthly Recurring Revenue (MRR)

Monthly Recurring Revenue (or 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.

Generally, MRR should grow alongside your subscriber count, and as such is a huge part of assessing your general trajectory over time. In addition, it’s pretty crucial for calculating other metrics, such as ARR (Annual Recurring Revenue) and ARPU (Average Revenue Per User), as well as in other contexts.

Example: $100 (average monthly revenue per subscriber) * 1450 (total subscribers) = $145,000 MRR

Annual Recurring Revenue (ARR)

This is calculated in a similar way to MRR, but serves different needs. It’s useful for creating annual reports or long-term forecasting. Make sure you don’t include any free trials or other non-revenue generating promotions in this calculation, as it blurs the context of your final result.

Example: $100 (average monthly revenue per subscriber) * 1450 (total subscribers) * 12 = $1,740,000 MRR

Average Revenue Per User (ARPU)

This is a particularly useful metric to track if you’ve got different tiers of membership, which makes it hard to figure out what your average subscriber is actually contributing to your bottom line. To calculate this, take your MRR and divide it by the total number of customers. This metric can help you inform your sales and marketing efforts, upsell and downsell opportunities, retention strategies, and more — happier users will buy add-ons and upgrade their subscriptions, for example.

Obviously, you should be trying to increase this KPI over time. But you should also be aware of how ARPU can help you.

  1. 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.
  2. 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.
  3. 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.

Example: $145,000 (revenue from all subscribers) / 1450 (total subscribers) = $100 (ARPU)

Customer Acquisition Cost (CAC)

CAC is a straightforward metric that tells both you and your stakeholders if your subscription business is viable. In the long term, you need to be spending less acquiring a typical customer than what you’re earning per user.

The tricky part of CAC is the actual calculation. Which costs should you include? Generally speaking, the CAC is calculated by dividing the total amount of cost spent on acquisition activity by the total number of customers acquired in a set period of time.

Example: $14,500 (total acquisition costs per year) / 1,450 (total subscribers gained in 1 year) = $10 (CAC)

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 sales and marketing 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.

Churn Rate (no acronym!)

Churn is inevitable, especially for subscription businesses. Churn tells you how many of your current customers you’re losing and how much revenue your business has lost over any meaningful time period. Effectively, Customer churn will tell you how many of your original customers (at a point in time) have unsubscribed.

Most businesses aim to keep churn below 4%, but staying on top of all the contributing factors, from difficult-to-use UI experiences to late deliveries, can all contribute, and need to be prioritized according to your unique customer needs. The best way to do this, broadly speaking, is to ensure two things: you’ve got a solid process in place to solicit feedback, and the typical customer experience is as seamless as possible.

Churn is an essential metric to keep an eye on 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.

So how do you calculate churn? Easy. Take the total amount of cancellations you’ve had during a given period, divide it by the total number of subscribers during the same period, and then convert it to a percentage.

Example: 145 (cancellations during period) / 1,450 (customers at beginning of period) x 100 (percentage conversion) = 10% (churn rate for period)

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.

Customer Lifetime Value (CLV), a.k.a. Lifetime Value (LTV)

Customer Lifetime Value is one of the most important metrics for subscription-first businesses as one of the core tenets of the business model itself is delighting customers and getting them to stick around for the longest period of time possible — ideally forever!

In essence, the higher this number, the bigger value your product is perceived as having to your subscribers, and the more they’re happy to spend on your service. Whether you’re the first business to make a subscription-first model for an essential service (think toilet paper delivery) or you’re known for your hyper personalized, bespoke boxes (think clothing subscriptions), once your product is deeply embedded in a subscriber’s way of life, this number can only increase.

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 CLV/LTV. This means you should have been in business for some time to get an accurate CLV/LTV metric.

Example: $100 (ARPU) / 10 (churn rate) * 100% = $1000 (CLV/LTV)

You can also break down CLV/LTV for each channel. Not all channels yield leads of the same quality, and high conversion rates don’t mean much if the CLV/LTV is low. You can filter out the channels that are working best for you and double down to get the best quality leads.

CLV/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.

Payback Period (PBP)

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).

This is an important metric because when you’re in the acquisition stage, you don’t benefit from acquiring a customer until their subscription revenue is higher than the CAC.

The payback period for a given customer can be calculated by dividing your Customer Acquisition Cost (e.g. paid media and custom onboarding processes) by the difference between the total revenue contributed by the customer within a given time period (say, a month) and the average cost of service (i.e. the total costs of the aspects of your business specifically linked to providing your service, think web hosting versus office equipment). It’s expressed in terms of time, and the ultimate goal is to reduce it.

Example: $10 (CAC) / $100 (subscription cost per month) – $95 (average cost of service) = 2 months (payback period)

Transactional business metrics

On the other hand, transactional businesses are more concerned with metrics like the Gross Margin, the Average Order Value (AOV), and general website metrics — broader metrics that aren’t really linked to the individual experience of the customer journey as a whole.

Gross Margin

To calculate your gross margin, you need to get two figures down first. The primary figure should be easy to find: it’s your sales revenue. There’s more moving parts to the second figure, which is your total costs. These consist of everything from the costs of paying your support team to your web hosting fees, your marketing spend, the cost of packaging or procuring samples for first-time customers, and more.

The reason that this isn’t the most important indicator for subscription-first businesses, while transactional businesses will often rely on it, is that it can be pushed up by reducing costs and focusing on boosting one-time sales. It is not only counterintuitive within the context of customer loyalty and customer retention, but provides very little information about either of these too.

In any case, once you’ve got these 2 figures down, it’s time to calculate:

Example: ($120,000 total sales revenue in 1 year – $60,000 costs in 1 year) / $120,000 * 100 = 50% gross margin.

Average Order Value (AOV)

In a nutshell, your average order value tells you how much money a customer spends on average on a single order, and is pretty huge in the world of eCommerce — albeit more important for transactional businesses than subscription businesses, as the main goal for the latter is to have people come to the checkout once and subscribe indefinitely, whereas because most customers in a transactional business model will be one-time purchasers, the goal is to get this one-off order number as high as possible, thus extracting the most value per customer with the assumption that they won’t come back time and time again for the same thing.

Similarly to your gross margin, calculating your AOV requires two figures: your total revenue and the total number of orders in a given period.

Example: $120,000 worth of orders in 1 year / 1000 orders = $120 average order value.

Website Metrics

Website metrics are a bit of a double edged sword, as while it’s important for both subscription and transactional businesses to maintain a close eye on their website data, subscription-first businesses are more likely to focus on one main process: streamlining the process of getting people into their funnel — i.e. into their checkout flow and converting, versus encouraging people to explore every part of their site and every bit of their content. Transactional businesses often emphasize the importance of metrics like total traffic, session duration, and device type, which aren’t always the top indicators of how well you’re able to convert your users.

Tracking your metrics - a brief guide to dashboards

A dashboard, in its simplest form, is something you set up to get a snapshot of all your important metrics in one place.

The easiest way to track your metrics is by setting up a dashboard in a spreadsheet using a program like Excel or Google Sheets. It’s a pretty simple process:

  1. Use the columns to set headers indicating the time interval you’re tracking your metrics within, such as calendar week, month, or quarter.
  2. Use the rows to list your metrics, the variables that go into your calculations, your targets, and the actual numbers you’ve achieved, alongside a formula indicating how far you are from your goals.
  3. Depending on the tools you’re using to generate your numbers, you might also be able to automatically pull numbers from various other applications into your spreadsheet, removing the need to spend any time manually entering data.
  4. You can grow or expand your dashboard as your business expands, and create new ones for different contexts and different employees.

So, what did we learn?

To sum things up, here’s the main idea: your business isn’t just about creating something cool and hoping people will buy it, it’s about understanding the numbers that go into the objective concept of ‘success’, which can be completely different from company to company, and business model to business model.

Each one of the metrics above (and this is a non-exhaustive list) should be analyzed within the context of your business, and seen as a lever that moves the needle further away from, or closer to, your goals. When set up correctly, you’ll be able to have a more transparent overview of where your business is today, spot problems well into the future, and act accordingly to maximize your chances of success and sustainable growth.

As a subscription-first business, you’re more likely to track metrics that indicate that you’re delighting your customers and that they’re a) converting fast, b) not churning, and c) becoming cheaper to attract and retain over time.

By Zaki Gulamani
Сontent creator at Subbly