Do you own an online subscription business? If so, you should be tracking these eight metrics to see how your business is performing.
The subscription business online has gained popularity over the years due to its predictability in revenue. Unlike the transactional business model, the subscription business model gives more sustainability and longevity to your business.
This is why many businesses, from streaming services and eCommerce to consumer goods, have moved to the subscription business model.
But having a subscription model business doesn’t give you a guarantee for long-term growth. No matter how many new customers you acquire, if you can’t keep them, you will lose your revenue.
To ensure longevity and sustainability for your subscription business, you should be aware of how your business performs and will perform in the long run.
In this article, we will be discussing the eight key metrics to track for a successful subscription business. These metrics will help you see how well your business is doing and how it might do in the future.
That being said, let’s get started.
Now let’s see some of the benefits of tracking metrics for your business:
- Data-driven insights: By tracking the right metrics, you will have a clear understanding of how your business is performing. These metrics give data-driven insights into various aspects of your business, such as customer behavior, revenue trends, and engagement levels.
- Better decision-making: When you have the right metrics, you can make better decisions based on the given data rather than assumptions. This helps you cure the cause and not the symptoms.
- Identify the issue early: If you are tracking subscription metrics regularly, you will be able to identify any issues causing revenue loss at the early stage. It helps you fix the issue before it escalates and becomes worse.
- Set practical goals: Subscription metrics help you set specific goals and track your progress toward achieving them. Whether you want to increase revenue, improve customer satisfaction, or expand your subscriber base, metrics help you to meet your goals.
- Compare performance: Metrics provide you with data on your performance in the past periods. You can compare your current performance with the past periods or the benchmarks. It helps you identify areas that need improvement.
Here are the eight key metrics to track for a successful subscription business:
1. Churn rate
The churn rate is the rate at which your subscribers cancel their subscriptions over a period of time. It is an important metric to understand whether your business will succeed in the long run. Most subscription businesses prefer to have a lower churn rate and retain their customers.
There are various factors that cause churn in your subscription business, such as poor customer service, high pricing, seasonal trends, etc.
To learn more about the churn rate in subscriptions, read our article on “What is Subscription Churn? How to Reduce it?
To calculate the churn rate, use the below equation:
Churn Rate = Number of Unsubscribed Customers ÷ Total customers at the beginning of the time period x 100
For example: Let’s say you have a total subscribers of 50 at the beginning of a month, and at the end, 10 customers unsubscribed from your business.
So, your churn rate would be (10 ÷ 50) x 100 = 20%
So you lost 20% of your subscribers at the end of the month.
2. Monthly Recurring Revenue (MRR)
Monthly Recurring Revenue, or MRR, is the revenue generated from subscriptions for a month. It includes the revenue from new subscriptions and renewals. By tracking the monthly recurring revenue, you will be able to predict your revenue for the next month. You can also compare the MRR with the previous month to see if you have a loss of revenue.
To calculate the monthly recurring revenue, multiply the total number of subscribers by the monthly subscription rates.
Monthly Recurring Revenue (MRR) = Total Subscribers x Monthly Subscription Rate
For example: In May, you had a total of 100 subscribers, and the monthly subscription rate of your product was $10.
So your monthly recurring revenue would be,
100 x 10 = $1000.
If you have multiple subscription plans or sell multiple subscription products, you need to find the MRR for each subscription plan and then add it up to find the total monthly recurring revenue.
Total MRR = MRR1 + MRR2 + MRR3 + ……… MRRn
If you are following a quarterly or annual subscription model, you can find the monthly recurring by dividing the total subscription rate by the number of months.
Monthly Recurring Revenue for quarterly or annual subscriptions = Total Subscription Rate ÷ Number of Months.
You can find the total subscription rate by using the below formula:
Total subscription rate = Individual subscription rate x Total number of subscribers
For example: You have 100 subscribers who buy a product with an annual subscription of $240 dollars.
Total subscription rate = $24,000 (240 x 100)
Number of months = 12 months
So your monthly recurring revenue would be,
24000 ÷ 12 = $2000
3. Annual Recurring Revenue (ARR)
Annual Recurring Revenue is the revenue generated from the subscriptions for a year. It is mostly calculated in financial year terms (1st April – 31st March). Annual Recurring Revenue is an effective way to compare year-on-year growth. It helps you have a better understanding of how your business is doing over time, especially when you’re planning for the long run.
If you have a monthly subscription plan, you can get the annual recurring revenue by multiplying the monthly recurring revenue by 12.
Annual Recurring Revenue (ARR) = Monthly Recurring Revenue (MRR) x 12
For example: Let’s say your monthly recurring revenue is $10; then your annual recurring revenue would be,
10 x 12 = $120
An important thing you should be aware of is that both the MRR and ARR are metrics to calculate the revenue generated from subscriptions. You might also be generating revenue from other sources, such as signup fees, trial fees, etc., which won’t be calculated under these metrics.
4. Average Revenue Per User (ARPU)
Average Revenue Per User (ARPU) is the average monthly revenue you receive from your subscribers. It is used to calculate the contribution of each individual user to your monthly revenue.
For businesses with tiered subscription plans, this is the most effective metric to calculate than the monthly recurring revenue. You can analyze ARPU for different subscription plans to get a more specific insight into your performance.
ARPU can be calculated by dividing the total monthly recurring revenue by the total number of subscribers.
Average Revenue Per User (ARPU) = Total Monthly Recurring Revenue ÷ Total Number of Subscribers
For example: If you have a monthly recurring revenue of $1000, and your total subscriber count is 100, the average revenue per user would be,
1000 ÷ 100 = $10
Tracking ARPU can help in both short-term and long-term planning. It gives you insights on how to increase your MRR by encouraging customers to choose higher-tiered plans for your business.
5. Customer Lifetime Value (CLV)
Customer Lifetime Value (CLV) is the total revenue each customer would bring during their lifetime as a subscriber. The longer the customer retains, the higher the CLV will be. CLV is an effective metric to identify the sustainability of your products in terms of revenue generation and customer retention.
Customer Lifetime Value (CLV) = Total amount spent by a customer during their subscription lifetime
The Customer Lifetime Value also gives you an idea of how much to spend on customer acquisition. It also helps you identify the high-value customers for your business. You can reward them with incentives and gift cards for their loyalty to your brand.
6. Customer Acquisition Cost
Customer Acquisition Cost is the amount of money you spend to acquire a customer. It includes all your sales and marketing budgets used for acquiring new customers. Tracking customer acquisition costs can help you have better budgeting for your marketing efforts.
Customer Acquisition Cost (CAC) = Total expenditure on marketing ÷ Number of customers acquired
The idea is to have as much lower CAC as possible to have more profits. Businesses usually spend a lot of money on advertising and promotions; this will significantly increase the customer acquisition cost.
7. CAC to LTV Ratio
The CAC to LTV (lifetime value) ratio compares the cost of acquiring a customer to the value that the customer brings to the company over their lifetime. It helps businesses analyze the effectiveness of their efforts in bringing new customers.
The formula for this ratio is CAC ÷ LTV.
If the CAC: LTV ratio is less than 1, it means that your business is acquiring customers at a cost lower than their potential lifetime value. If it is above 1, you are spending more on customer acquisition than the customer’s lifetime value. In such a case, you are having a revenue loss and might end up in shutdown very soon.
8. Retention Rate
Retention rate is the percentage of customers who continue their subscription in a given period of time. A higher retention rate means your customers are happy with your products and services.
Churn rates and retention rates are inversely proportional to each other, so a higher retention rate logically means having a lower churn rate for your business.
Retention rate = Number of active subscribers ÷ Total customers at the beginning of the time period x 100
For example: Let’s say you have a total subscribers of 100 at the beginning of a month, and at the end, the number of active subscribers is 90; so your retention rate would be
90 ÷ 100 x 100 = 90%
Conclusion
We know there’s a lot of math in this article, but that’s how you keep track of your business, isn’t it? The eight key metrics we mentioned in this article will help you make better decisions about your business and keep track of your performance. It helps you have a better understanding and predictability of your business revenue.
Knowing these metrics goes beyond just doing the math. It also involves comparing them to past periods, understanding what the numbers mean, and making important decisions based on whether things are going well or not.
If you find this article to be informative, let us know in the comments.
If you are planning to start a subscription business model, check out our detailed guide on “How to build a subscription website to earn recurring revenue?”
