Subscription businesses have a unique opportunity to create lasting relationships with customers and build recurring, sustainable revenues. They also risk losing those customers for many reasons, ranging from economic factors outside their control to a perceived (or actual) drop in the quality of the product or service they offer.
By adopting a data-driven approach, businesses can accurately understand their successes and challenges, before using this information to encourage loyalty, optimize their subscription strategies, drive growth, and enhance profitability.
Today, companies have access to a vast and growing supply of data which can enable informed decision-making. To help subscription businesses unlock the power of this information, Subsbase has compiled a comprehensive overview of key metrics, their significance, and how to measure them.
We want to equip you with the knowledge and tools necessary to assess the health of your subscription business, identify areas for improvement, and implement strategies to maximize revenue growth.
1. Monthly Recurring Revenue (MRR)
Summary: MRR reflects the predictable, recurring revenue generated from subscriptions on a monthly basis, providing a foundational metric for gauging business stability and growth potential.
Formula: MRR = Sum of the Monthly Subscription Fees
Why is this metric important? Measuring MRR provides subscription-based businesses with a strong baseline to determine cash flow and plan budgets effectively. By understanding the revenue generated from subscriptions monthly, businesses can make informed financial decisions, deliver accurate forecasts, and allocate resources strategically. Ultimately, this knowledge allows businesses to drive financial stability, evaluate performance, and instil confidence in investors and stakeholders.
2. User Churn Rate
Summary: This measures the rate at which customers unsubscribe or discontinue their subscriptions, acting as a crucial indicator of customer satisfaction and loyalty. Also known as customer churn, user churn measures the number of customers lost during a specific period.
Formula: User Churn Rate = (lost customers ÷ customers at the start of period) x 100
Why is this metric important? Calculating user churn provides a clearer understanding of customers' perception of your service. Regardless of how fast new customers are acquired, if a business struggles to retain existing customers and keep them satisfied, attrition will gradually erode the customer base. Measuring user churn allows businesses to identify retention issues, address customer satisfaction gaps, and enhance customer loyalty.
3. Revenue Churn
Summary: A critical metric that quantifies the amount of revenue lost due to cancellations and downgrades within a specific period. Unlike customer churn, which focuses on customer numbers, revenue churn assigns a monetary value to the loss of business.
Formula: Revenue churn rate = (Lost revenue ÷ Revenue at the start of the period) x 100
Why is this metric important? By tracking revenue churn, businesses gain valuable insights into the financial impact of customer attrition. This metric helps companies to prioritize retention strategies and allocate resources effectively.
Understanding revenue churn enables businesses to evaluate the overall health of their customer base and make informed decisions to minimize revenue loss.
4. Customer Lifetime Value (CLV or CLTV)
Summary: CLV measures the total value a customer brings to the business over their entire relationship, helping businesses understand the profitability of their client base and take data-driven action on acquisition and retention strategies.
Formula: CLV = Average Revenue per User (ARPU) x Average Customer Lifespan
Why is this metric important? Measuring CLV is vital for businesses seeking to maximize revenue and optimize their operations. By gaining insights into customer segmentation, allocating resources efficiently, and guiding customer acquisition and retention strategies, companies can target the most valuable customer segments and foster long-term success. Understanding CLV empowers businesses to build lasting customer relationships, drive sustainable revenue growth, and create a competitive advantage in the market.
5. Customer Acquisition Cost (CAC)
Summary: CAC measures the resources expended to acquire a new customer, enabling businesses to evaluate the effectiveness and efficiency of their marketing and sales efforts.
Formula: CAC = Total Sales and Marketing Expenses ÷ Number of New Customers Acquired
Why is this metric important? Measuring Customer Acquisition Cost (CAC) is essential for businesses to understand the investment required to acquire new customers. By comparing CAC with metrics like Customer Lifetime Value (CLV), companies can assess the sustainability of the business model. Analyzing the cost incurred to acquire customers allows businesses to determine if their revenue streams will be profitable in the long term and identify opportunities for cost optimization and efficiency.
6. Monthly Active Subscribers (MAS)
Summary: MAS counts the number of unique subscribers who actively engage with the subscription service during a given month, providing insights into user engagement and the overall health of the business.
Formula: MAS = Total Subscribers at the End of the Month - Churned Subscribers
Why is this metric important? This metric lets subscription businesses assess customer engagement, retention, and revenue potential. It empowers businesses to optimize marketing efforts, enhance customer experiences, and foster long-term growth. By monitoring MAS, subscription businesses can adapt to customer needs, improve customer satisfaction, and position themselves competitively in the subscription market.
7. Average Revenue per User (ARPU):
Summary: ARPU indicates the average revenue generated from each active subscriber, allowing businesses to assess their pricing and the value customers derive from their offerings.
Formula: ARPU = Total Monthly Revenue ÷ MAS
Why is this metric important? Understanding ARPU helps to define an effective pricing strategy by providing insights into the revenue generated per user, enabling businesses to determine the optimal price points and offerings that balance customer value and profitability. This enables them to maximize revenue potential and maintain a competitive edge in the market.
ARPU can also assists in inventory management. By analyzing the revenue generated per user, businesses can identify patterns and trends in product or service consumption. This information allows for better inventory planning, ensuring that sufficient resources are allocated to meet customer demand while minimizing excess inventory and associated costs.
8. Gross Margin
Summary: Gross margin measures the profitability of the subscription business by calculating the difference between revenue and the direct costs associated with delivering the service.
Formula: Gross Margin = (Total Monthly Revenue - Cost of Goods Sold) ÷ Total Monthly Revenue
Why is this metric important? This key KPI is essential for evaluating the profitability of products or services and identifying opportunities for cost optimization. By understanding the revenue remaining after deducting direct costs, businesses can make informed decisions about pricing strategies, cost management, and process improvements to enhance profitability and gain a competitive advantage.
9. Customer Satisfaction Score (CSAT)
Summary: CSAT quantifies customer satisfaction levels by soliciting feedback through surveys or other means, facilitating a better understanding of customer needs and opportunities for improvement.
Formula: CSAT = (Number of Satisfied Customers ÷ Total Number of Survey Responses) x 100
Why is this metric important? CSAT is of utmost importance for subscription businesses as it provides valuable insights into the satisfaction levels of their customers. By assessing CSAT, businesses can gauge customer perception, identify areas for improvement, and strengthen customer loyalty, which are vital for the success and growth of a subscription- based model. It helps subscription businesses understand how satisfied their customers are with their product or service.
Tracking CSAT also allows subscription businesses to benchmark their performance over time and against industry standards. By gathering feedback, businesses can address customer concerns, make necessary enhancements, and continuously improve the customer experience.
10. Renewal Rate
Summary: Renewal rate tracks the percentage of customers who choose to continue their subscriptions upon expiry, serving as a reflection of customer satisfaction and the effectiveness of retention strategies.
Formula: Renewal Rate = (Number of Renewals ÷ Total Number of Expiring Subscriptions) x 100
Why is this metric important? Renewal rate is vital for subscription businesses to assess customer loyalty, satisfaction, revenue stability, and overall business performance. It enables businesses to identify areas for improvement, address customer concerns, and enhance customer retention efforts. By striving for a high renewal rate, subscription businesses can build a solid foundation for long-term success, profitability, and sustainable growth in the competitive subscription market.
Counting On Success
To excel in the subscription-based business arena, understanding and effectively leveraging key metrics and KPIs is imperative. Armed with these metrics and their accompanying formulas, leaders can assess the health of their subscription business, identify areas of opportunity, and drive data-informed strategies that lead to sustainable growth and customer-centric success. By embracing these metrics as guiding stars, businesses can unlock their true potential and thrive in the ever-evolving subscription landscape. Good luck!