Last editedMay 20222 min read
Subscription businesses that use consumption based pricing require a unique set of key performance metrics (KPIs) in order to gauge a full picture of company health.
In this post, we’ll define what consumption based pricing model is and outline some of the most integral KPIS for subscription businesses that use this model.
What is consumption-based pricing?
In a consumption based pricing model, a customer will pay according to the resources they consumed from the service. Typically, the provider will track customer consumption and then bill them accordingly. A common example of this is household electricity and utility bills which are usually calculated and charged according to consumption.
Sometimes referred to as usage-based pricing, utility-based pricing or metered billing, this pricing model is often used by subscription businesses, such as phone network companies. For example, with your monthly recurring phone contract, you may have X many local calls and texts, but will be charged extra when exceeding that number, or calling overseas. This ‘over’ consumption will then be charged as extra on your next phone bill.
KPIs for consumption based pricing
Now that we’ve explored some consumption based pricing examples, let’s get into the principal KPIs used to measure company health in subscription businesses.
Churn rate is a KPI used to measure how many customers a business is losing. It can be calculated by dividing the number of customers who leave over a specific period by the total number of customers during that same period.
Churn rate = customers leaving/total no. of customers
Churn rate is valuable as it provides feedback on how well-liked and successful a service is. A high churn rate, for instance, will indicate that there are issues with the service which need to be improved. A low churn rate, meanwhile, indicates that customers are satisfied with the service provided. This KPI can also give some indication of the average length of time customers tend to stay with a company.
Active subscriptions refers to the number of customers currently subscribed to your service. When presented on a graph, ideally you want there to be a steady increase in subscriptions over time. Better yet, a steep curve. But you certainly don’t want to see a significant decrease as this indicates you are losing more customers than you’re gaining.
Net Promoter Score (NPS)
The net promoter score is a loyalty metric used to gauge the number of satisfied customers proportional to unsatisfied customers. Data is gathered via a survey asking users “On a scale of 0-10, how likely are you to recommend our service to a friend?”
Using this data, the NPS can be calculated using the following formula (respondents who voted 0-6 are detractors, 7-8 are passives, and 9-10 are promoters):
(no. promoters - no. detractors) / no. total respondents X 100 = NPS
While this KPI can give you some indication of overall customer satisfaction rates, it’s not foolproof. This is because it relies on customers taking the time to respond to the survey. As many don’t, you inevitably lack large portions of data, meaning your score might not necessarily reflect actual satisfaction rates.
Why GoCardless is great for subscription businesses
GoCardless enables businesses to collect payments directly from their customers' bank accounts. This places businesses in full control and makes collecting recurring subscription payments easier than ever.
It's easy for small subscription businesses to get started as, unlike traditional direct debit solutions offered by banks and bureaus, GoCardless is easy to set up and cost effective. Additionally we handle, set up, and establish relationships with the banks - making sure things like payment pages are compliant and information is stored securely.
It's also straightforward for small businesses to use. This is because we make hosted checkout flows which facilitate the sign up of new customers. These high converting payment pages are available in a variety of formats including hosted pages, drop-in modules, and custom options.
We also provide an easy-to-use dashboard so that you can see statuses and request payments. This provides increased visibility overall.
Finally, we also integrate seamlessly with 300+ partners, including major invoicing software like Xero and QuickBooks, so you can start using GoCardless right in your workflow.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.