Last editedMay 20223 min read
Subscription business models are becoming increasingly popular, growing by over 435% in 9 years — with trends set to continue. However, subscription services have come with their own unique set of performance indicators and metrics. In this post, we’ll guide through the most important key performance indicators (KPIs) for subscription businesses so you can effectively track the health of your company.
8 most important KPIs for subscription business models
1. Monthly recurring revenue (MRR)
MRR is one of the most important metrics for subscription businesses, indicating the revenue a company can expect to receive on a monthly basis.
To calculate MRR you simply take the number of customers you have and multiply it by the monthly rate they pay. If you take payment on an annual basis, you instead divide the annual rate by 12 to give you your monthly revenue expectations.
MRR = no. of customers x monthly rate
2. Annual recurring revenue (ARR)
ARR bears some similarities to ARR, but gives you more of a long-time look at revenue over the course of the coming year, making it useful for forecasting purposes.
To calculate ARR, multiply the monthly rate by 12, and multiply the result by the number of customers.
ARR = (monthly rate x 12) / no. of customers
3. Average revenue per user (ARPU)
If your service offers multiple plans, MRR and ARR can be skewed since different customers are paying different amounts per month or year. This is why ARPU can be valuable supplementary information.
To calculate ARPU, divide your MRR value by the total number of customers.
ARPU = MRR / no. of customers
4. Customer lifetime value (CLV)
CLV is a means of ascertaining how much revenue an individual customer is likely to bring into a business throughout the course of their life. This will be a healthy figure so long as it exceeds the costs of onboarding the customer and delivering them the service.
Calculating CLV can be a little complicated as you need additional metrics. However, the basic formula is the following:
CLV = Average Transaction Size x Number of Transactions x Retention Period
5. Customer acquisition cost (CAC)
Running a successful subscription business depends on two things: acquiring customers and retaining them. In addition, customer growth and profit relies on customer acquisition always exceeding customer churn (see below).
Therefore, CAC is imperative as it indicates revenue expectations.
To calculate CAC, you need to add up the costs related to customer acquisition, including marketing and onboarding.
For further analysis, you can break the information down into different channels. For example, calculating the average CAC for acquiring customers over social media vs other channels. That way you can see the cheaper and more effective ways to acquire customers, which can inform your strategy going forward.
6. Churn rate
Churn is what every subscription company wants to avoid as it refers to the number of customers ceasing to use a service.
To calculate churn rate, you simply take the subscription cancellations you’ve received over a certain period and dividing by the total customers you had in that time.
Churn rate = subscription cancellations/total customers
To keep churn rate to a minimum, you should find out the causes of it and act to prevent them. This is often the most cost-effective way to improve your business’ financial health.
Involuntary customer churn is when a customer doesn’t intend to end their subscription but fails to meet the payment due to a change in card or payment information. This can be greatly reduced by offering alternative payment methods like direct debit. With GoCardless, subscription payments can be collected directly from a customer’s bank account via direct debit, leading to far less failed payments. In fact, after being with us for a year, customers typically see a 13% reduction in customer churn — as a direct result of fewer failed payments.
8. Lead velocity rate (LVR)
Lead velocity rate shows how effective your business is at drawing in new customers.
To calculate LVR, you take the difference in qualified leads (potential customers) from one month to another, then divide that value by the number of qualified leads in the first month, then times it by 100.
LVR = ((no. qualified leads in current month - no. of qualified leads last month) / no. qualified leads last month) x 100
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.