Many people find subscription business model metrics confusing. Maybe they understand in part but not entirey. Is this you? We’re here to help!
Over two-thirds of American households use a subscription service to stream video content. There’s an explosion of other services too, such as e-commerce boxes and “games as a service.” With so many options available, it’s safe to assume everyone subscribes to at least something.
This presents an opportunity for your budding business. But to truly succeed, you need to understand subscription business model metrics. Without these, you won’t be able to gauge the success of your subscription or make informed improvements.
Need some help understanding subscription metrics? Look no further. Here’s an overview of KPI’s for subscription business services.
1. Monthly Recurring Revenue (MRR)
The monthly recurring revenue, or MMR, is a key performance indicator. In short, it’s the total revenue generated by your subscription service. Naturally, the purpose of your subscription service is to generate a consistent flow of revenue.
You’ll want to gauge this metric every month to ensure your service continues to grow. When you make large changes to your subscription service or start a powerful new marketing campaign, you should also turn to the MRR.
At a glance, a healthy MRR suggests your other metrics are in great shape. But of course, there’s always room for improvement.
It’s more difficult to calculate your MRR with a complex payment model. A subscription-based revenue model with no special deals or incentives keeps things simple. If you collect immediate first-time payments, don’t forget to include these in your calculations.
2. Churn Rate
Subscribers won’t stay forever. Part of running a subscription service means dealing with the dreaded churn. Every month, a portion of your subscribers will drop the service.
These ex-customers are known as churn. But this number isn’t very useful on its own. You want to know how many customers left in relation to the total number of subscribers.
For that, we need the churn rate. The churn rate depicts the percentage of subscribers who cancelled the program compared to those who remain. It may sound complicated, but it’s really not.
Let’s start with a simple example: You had 478 subscribers at the beginning of the month. By the end of the month, 32 subscribers left the service. This gives you a churn rate of 6.7%.
Yes, maybe next month you have over 500 subscribers because you gained more than you lost. But you still lost some, and that’s the snapshot the churn rate aims to capture.
The lower your churn rate, the better. It means your subscribers are happy with your service. When this number begins to climb, you may want to seek out ways to add more value to the service to keep current subscribers happy.
3. Average Revenue per User (ARPU)
If you only offer a single subscription plan, your users are more or less paying the same amount every month. But let’s say you have multiple services at different price points. How do you determine the revenue you earn from the average customer?
That’s what ARPU is all about. The average revenue per user measures how much your typical customer spends on your service. Even with a single payment option, it will change slightly under market fluctuations and temporary deals.
But this metric is even more important for companies that offer more complicated subscription plans. Ideally, you will have an ARPU for each type of plan as well as an overarching ARPU.
This information is invaluable. You’ll get a good handle on your most popular plans and learn which are pulling their weight — and which aren’t. Of course, it can also help you plot your growth model as you gain customers since you know what they’re worth on average.
ARPU is sometimes known as ARPA (or average revenue per account) depending on your industry.
4. Customer Lifetime Value (CLV)
Many of the metrics we’ve looked at thus far are short-sighted. But now that we’ve established monthly trends, we can project these on a larger scale. For example, you know how much an average customer pays every month, but how much will you get from them in total?
That depends on how long they stay with the program, and — wait a minute, don’t we have a metric for that, too?
The customer lifetime value informs you how much you’ll earn from the average customer throughout their stay. How does it work? Well, let’s use our numbers from earlier.
We know we have a 6.7% churn rate. For reference, this means the average customer will stay with the program for just shy of 15 months. If our average revenue per user is $50 a month, our CLV is about $750.
This can get pretty complicated, so you should learn more about CLV and other subscription metrics.
5. Customer Acquisition Cost (CAC)
Customers aren’t free. Your business needs to invest in a robust marketing plan to acquire new subscribers. Thankfully, there’s an easy way to see if your marketing approach is getting the job done.
Pay close attention to your marketing budget. Once you launch the marketing program, you’ll want to see how many customers you ultimately add. By comparing these numbers you can calculate the customer acquisition cost, i.e., how much you spend per sign-up.
Let’s say your budding startup spent $10,000 this month to market its new subscription service. Your number of subscribers jumped from 4,322 to 5,670. That’s a net increase of 1,348 customers.
That means, for every $7.40 you spent on marketing, you gained a customer. Not bad when you remember our estimated CLV is $750!
Understanding Subscription Business Model Metrics
When it comes to subscription models, the metrics are just as important as the service. You’ll know what’s working, what’s not, and when to implement new changes to continue growing your startup.
Keep an eye on your subscription business model metrics. The next time you evaluate your business goals, you’ll be ready. Just follow the numbers.
Looking to grow your budding company? Find more great advice in our business section.