A Few Key Performance Metrics For Subscription Businesses
If you’re using subscription pricing, the metrics you use as key performance indicators might be different than for a more transactional business model.
While many of the same metrics will be useful, the following may be new to you, and are critical in assessing the health of your subscription revenue:
Expected Customer Lifetime Value (ECLV) and Actual Customer Lifetime Value (ACLV)
ECLV is the estimate you use for the value of each customer who subscribes. You might have different ECLVs for subscribers acquired by different channels or at different times of the year or through various offers. ECLV is different from ACLV , which you can’t know for sure for any given subscriber until he or she cancels.
Churn and Retention
The sum of these two must equal 100 percent. If you retain 95 percent of your subscribers from last month to this month, your churn for that period would be 5 percent. Churn is often higher in the first few months after acquisition and then flattens out.
Average Revenue per User (ARPU)
ARPU measures the amount of money that a company can expect to generate from an individual customer. This monthly metric averages out different tiers and add on fees to give a sense of what each new subscriber is likely to be worth. It also allows companies to track trends in spend—whether people are spending an increasing or declining amount this month as against the past month.
Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR).
These parameters measure how much revenue you collect each period based on the number of customers you have and their churn rates.
Customer Acquisition Cost (CAC)
This number varies by channel and cohort and tells you how much each new customer costs to acquire. By itself, this number isn’t that useful—it’s most valuable as a ratio with the metric identified below.
CLV/CAC
This ratio tells you how much money you can expect to receive for your marketing expenses. When calculating these metrics, it’s crucial to understand how they depend on each other. For example, it’s not enough to have a low CAC if the corresponding CLV is low.
Of course, metrics used in more transactional businesses like Net Promoter Score (NPS) and Customer Engagement (e.g.,, frequency of purchase, breadth, and depth of purchase, etc.) are also valid for measuring the health of subscription revenue.
A common mistake is to average out these metrics instead of looking at them by cohort. For example, it may be that people signing up for a subscription today have higher first-month churn than people who signed up a year ago—and that could be a signal of a change in the market. It is essential to track Cohorts separately and then compared them to find patterns.
It is also not enough just to track metrics. You have to develop benchmarks and look at trends within your business. For example, if CAC is increasing while Retention is declining, there’s probably a change in market conditions you need to understand
Understanding metrics is key to success with any subscription-based business.
This blog post was written by Robbie Kellman Baxter, founder of Peninsula Strategies, LLC, and a bestselling author. She is an expert on membership and subscription-based business models. Her clients have included start-ups and mid-sized venture-backed companies as well as industry leaders such as Netflix, Oracle, Electronic Arts, and eBay.