The subscription business model offers numerous benefits, from easier inventory management to the promise of recurring revenue. Yet as with any other business model, it’s important to track financial metrics carefully to ensure you’re on the right track. Here are six subscription business model metrics that can help you make more informed financial decisions and fuel sustainable growth.
Customer lifetime value (CLV)
We’ll start the list with one of the most important subscription metrics: customer lifetime value (CLV). This tracks the total revenue that each individual brings to your business throughout their lifetime as a customer.
CLV = Projected revenue – Cost of customer acquisition
Because subscription models look at long-term value, you should place more value on those customers with a higher CLV. A low overall CLV points to serious issues with your business model, whether it’s low renewal rates, high subscriber churn, or a high cost of customer acquisition.
Subscriber churn rate
Churn is an important metric for any business, but it’s particularly relevant to subscription models that rely on service renewals.
Subscriber Churn Rate = (Cancellations per month / Total customers per month) x 100
While it may not be possible to eliminate churn completely, a high churn rate indicates that your customers aren’t as happy as they could be. This could be due to poor quality of products or difficulty using your apps. When you notice a high subscriber churn rate, it’s time to get in touch with your customers and ask for feedback. That way, you’ll be able to implement more effective changes and improve customer retention.
Monthly recurring revenue (MRR)
Several metrics for subscription services relate to revenue. One popular metric to follow is monthly recurring revenue, or MRR.
MRR = Total customers x Monthly payment rate
This shows the amount of revenue you can rely on from your subscription customers from one month to the next, assisting with financial planning in the short term. Business analysts and investors will use MMR to look at real-time financial health, alongside cash flow and other metrics like CLV.
Annual recurring revenue (ARR)
While MRR takes a short-term view of recurring revenue, you can also zoom out in scope with annual recurring revenue, or ARR.
ARR = Total customers x Annual payment rate
You’ll want to look at this metric when pulling together annual reports or working on long term financial forecasts over several years. While MRR might be influenced by free trial months or sudden cancellations, ARR gives a wider picture of your sales trajectory over time.
Customer acquisition cost (CAC)
You can’t grow your business without acquiring and retaining new customers. Customer acquisition cost (CAC) must be kept under control to sustain profit and growth.
CAC = Sales and marketing costs / Total new customers
If your CAC is high enough that it takes multiple months of revenue to break even, this indicates that it’s time to reassess your marketing efforts. Some acquisition methods will be more cost-effective than others, whether you focus on social media or PPC ad campaigns. Understanding these acquisition metrics for subscription services gives you a better idea of whether your efforts are worthwhile.
Lead velocity rate (LVR)
Another acquisition-related metric is lead velocity rate, or LVR. This measures how effective your business is when it comes to attracting new sales leads.
LVR = (Difference in qualified leads between months / Quarterly qualified leads) x 100
A drop from month to month shows that your marketing efforts need reassessment. By contrast, if your LVR is positive, this shows that your current sales and marketing plan is working well. Tracking LVR over time is also useful for businesses because it can take factors like seasonal sales into account.
Subscription metrics: the bottom line
You can break down subscription business metrics into acquisition, revenue, and retention categories. It’s important to look at these figures holistically to better understand how your business is performing. Where are you excelling and what are some areas for improvement? For example, you might be attracting a high number of qualified leads, but if you’re still experiencing a high churn rate it indicates you must focus on retention.
By tracking subscription metrics, you’ll gain greater insight into performance to formulate a more effective strategy for growth. GoCardless can help with taking subscription payments and ensuring the payments process runs smoothly and securely, for one less thing to worry about.
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