Adopting a subscription business model means making changes. That’s not just changing how you price your products and how you interact with your customers. You also need a new way to relate to subscription metrics.
Using subscription metrics changes how you see customer data. Metrics are no longer simply about conversion rates or one-time transactions. Using subscription metrics means that your finance team transforms from mere cost accountants to true business value architects.
But how do you define subscription metrics? How do you ensure they correspond to the subscriber journey? How do you use reporting on your subscription metrics to derive meaningful insights and promote transparency and coordination among your team?
Running a subscription business requires a shift in thinking about your customers, your products and your metrics. Reporting on subscription metrics helps you build a better, more predictable business. It also makes it easier to forecast future revenue and provide visibility into the health of your business. All this will make your business more responsive to customer demands. Moving quickly to respond to those demands cements strong and long-term customer relationships, which are the foundation of growing recurring revenue.
Subscription Metrics 101
Has a board member ever asked you to include information on the health of your subscription program in your reports, only to find yourself spending too long determining what to measure and which formulas will accurately represent your pricing model? Subscription metrics are a set of measurements laser focused on your organization’s customer relationships and on building a stream of predictable revenue. These metrics are jointly owned across an organization, meaning the Sales team, the Customer Success team — even the CIO — help meet strategic KPIs.
There are many subscription metrics to be aware of, but we’ve outlined the most critical subscription metrics to track.
Monthly Recurring Revenue
A calculation of your subscription revenue amortized by month, and it is the most important metric your subscription business needs to calculate.
MRR = Amount paid / Number of subscription months
The rate at which customers are canceling their subscriptions.
Churn rate = Number of customers who canceled in a billing period / Total number of customers at start of the billing period
Customer Lifetime Value
An estimate of the average total value of a customer over their lifetime (from signup to churn). This is one of the most difficult metrics to calculate, but is vital to getting a better picture of the overall health of your business.
CLV = (ARPA x Gross Margin %) / Customer Churn Rate
ChartMogul does an excellent job of explaining how customer lifetime value can be estimated, how to respond if it is low or high, and why one that fluctuates over time can actually be a sign of instability.
Customer Acquisition Cost
An estimate of the costs to acquire a customer.
CAC = Sum of all sales & marketing expenses / # of new customers added
There are also many traditional financial metrics that can easily be used to measure the health of a subscription program: from Total Contract Value and Growth Efficiency Index, to Cost of Goods Sold (COGS), and metrics that support Generally Accepted Account Principles (GAAP).
Building Subscription Metrics into the Subscriber Journey
The subscriber journey documents the touchpoints your buyer may experience on their way to their decision to purchase. The subscriber journey is a powerful tool for understanding your customers: where they start, what challenges they’re facing, and how fast they’re moving. It’s important that your metrics are in line with the journey of your subscribers and that they center on recurring revenue.
Your subscription metrics should help you answer key business questions like:
- How quickly are customers adopting your product/service?
- Does your customer experience allow your organization to hit revenue targets?
- Knowing that no single buyer journey is exactly the same, how do you model the sales cycle?
- With an eye on recurring revenue, are your numbers telling you whether your customers committed?
- What do renewals look like?
Considering the subscriber journey as you measure your subscription program forces you to pay attention to your customers’ behavior to prevent losing them. It will also help you to avoid the pain of churn by watching for red flags. You’ll also know how to engage with your users at critical points in their subscription lifecycle – trial, subscribe, renew and upgrade.
Reporting Subscription Metrics
Subscription-based reporting is a powerful tool for identifying trends, measuring customer satisfaction, and improving the health of your business. Combining key subscription metrics with the right reporting provides important business insight. If metrics show customers are losing interest in your product, then reporting will alert your team to the issue. Reporting provides the insight to identify the potential loss of recurring revenue and to put preventative measures in place.
Maintain a current view of your business by reporting on monthly recurring revenue, churn, customer lifetime value and customer acquisition costs. Then run all of these metrics through your favorite ERP tool. It’s even possible to connect the billing tools your team uses most for more accurate analytics — regardless of where your data sits — and then run customer-centric subscription reports that can be presented to the board or across your organization. Use these reports to answer your most important questions: Which customers are past due on their billing? Which marketing channels send us the most valued customers? How much revenue are up-sells contributing to our bottom line?
Financials look different once your organization adopts subscription-based reporting. Your report transforms from Excel rows and columns into instant insights. With a focus on recurring revenue, as opposed to one-time transactions, this new approach to subscription reporting will allow you to share cost awareness throughout your organization and provide transparency throughout.