If you have a subscription-based business, then it is absolutely crucial for your company to keep subscriptions optimized at all times. However, unless you are tracking certain key subscription metrics, it is going to be very difficult for you to understand exactly what is happening with your subscriptions, let alone improve them.
However, if you are willing to track and analyze important subscription metrics, then you can gain valuable insights that can tell you where you are succeeding, and where you need to improve.
In this article, we are going to explain exactly what subscription metrics are and go over the top 6 most essential subscription metrics that you need to start tracking. Once you start tracking them, you will be able to get access to the information you need to improve your business.
What are Subscription Metrics
Subscription metrics are metrics that tell you how various aspects of your subscription business are performing.
Subscription metrics are similar to regular business metrics. However, they only reveal information for subscription-related activity. Many subscription-based businesses track performance using these metrics and you should too if you have a subscription-based business. Here are some of the most important subscription metrics to track.
1. Annual Recurring Revenue (ARR)
Annual recurring revenue, or ARR, is the total revenue that your business is generating per year. This metric gives you a solid understanding of the overall revenue that your business is generating on a yearly basis. To calculate ARR, you add up the amount of subscribers you have and multiply this by their subscription rates for one year.
One of the main reasons why this metric is so important is because it gives you the critical data you need to make accurate projections about what kind of revenue your business can expect to generate in the next twelve months.
This metric is especially useful for businesses that have an annual subscription model instead of a monthly subscription model. Annual recurring revenue gives you the information that you need to be able to make long-term financial decisions regarding your business. For example, if you know that your ARR is going to be around $2 million, then you might feel more comfortable hiring 6 new employees.
2. Monthly Recurring Revenue (MRR)
Monthly recurring revenue refers to the amount of revenue that your business is generating on a monthly basis. MRR is one of the most heavily used metrics in the subscription industry. This is because it shows how well a subscription business is performing on a month-to-month business. MRR is very helpful for tracking short-term performance. It can reveal crucial data about how well new strategies that your business implements are working.
The way to calculate MRR is by adding up the number of subscribers that you have and multiplying this by their monthly subscription rates. When you are calculating monthly subscription rates you should not include setup fees, suspended subscriptions, or one-time activation fees.
3. Churn Rate
Churn rate refers to the rate at which customers cancel their subscriptions. “The goal for any subscription-based business is to keep churn rates as low as possible.” If your churn rate is low, it means that your customers are satisfied with your products or services and that your business is on track for success. If your churn rates get too low, however, it means that you might have to start making some changes in order to prevent losing too much revenue.
In order to calculate the churn rate, you divide the number of customers lost by the number of customers at the beginning of the period. Then you multiply that number by 1,000 to get a percentage. So, for example, let’s say you lost 100 customers in January but at the start of January, you had 1000 customers. In this case, to calculate the churn rate, you would divide 100/1000, which would give you .1. Then, you would multiply .1 by 100 to get the churn rate. In this case, the churn rate would be 10 percent. Different industries have different churn rates that are considered normal. However, generally speaking, you want to see your churn rate going down, not up. If it is going up significantly, it is time to start taking action to fix it.
4. Renewal Rate
Renewal rate is a measure of the rate at which customers are renewing their subscriptions for your products or services. In order to calculate the renewal rate, you take the number of subscriptions renewed in a given period and divide it by the number of subscriptions due for renewal during that period. The renewal rate is the opposite of churn rate. The higher the renewal rate is, the better.
This metric is crucial because it tells you whether or not your products and/or services have long-term appeal to your clients. If your offerings lack long-term appeal, then you are going to have more trouble scaling your business because you will have to spend more time, energy, and resources replacing your customers. If the renewal rate is too low, then you are most likely going to have to make some significant changes to your products in order to fix this. You can get feedback from your customers through surveys and interviews to figure out why they did not renew. Then you can adjust your products in response to the feedback and try to improve the renewal rate.
5. Customer Lifetime Value (CLV)
Customer lifetime value refers to the amount of revenue that is generated on average from one customer of your business. You can calculate the customer lifetime value by dividing the average monthly recurring revenue per customer by the monthly churn rate. This is yet another imperative metric because you can literally learn whether or not your business model is sustainable by comparing the CLV to the customer acquisition cost.
As long as the customer lifetime value is higher than the customer acquisition cost, then your business has the potential to be profitable and sustainable. Generally speaking, the higher the customer lifetime value and the lower the customer acquisition value, the better for your business. In order to optimize customer lifetime value, you should strive to provide long-term value to your clients so that they keep renewing their subscriptions every year.
6. Revenue Churn
Revenue churn is similar to churn rate. However, instead of measuring the rate at which customers are canceling their subscriptions, revenue churn measures the amount of revenue that is lost in a given period due to customers canceling their subscriptions. In order to calculate revenue churn, you divide revenue lost during a period by the revenue in the beginning of the period.
Keeping track of revenue churn forces you to understand the exact financial losses that your business is experiencing per period due to churn.
As with many other metrics in this list, if the numbers are concerning, then you should take it as a red flag and start taking corrective actions immediately. The last thing you should want for your business is for it to have a high revenue churn rate.
Unfortunately, many subscription business owners do not keep careful track of subscription metrics such as the ones mentioned in this article. As a result, many subscription business owners are caught by surprise when their business starts to trend downward. Sadly, many business owners only realize that their businesses in trouble after it’s too late to do anything about it.
By carefully tracking the subscription metrics mentioned above, you can keep an ever-watchful eye over the most important KPI’s associated with your business. The best subscription business owners understand the importance of subscription metrics and therefore go out of their way to make sure that they are always tracking them.
There is a famous saying, “what gets measured gets improved.” This saying is highly relevant for the subscription business industry. Do not make the mistake of thinking that just because your business already has a large amount of subscribers that that is a guarantee that it will stay this way indefinitely. Just look at Netflix for example. At one time Netflix dominated the video streaming industry and had few competitors. However, now, there is a very high number of streaming services and thus, Netflix has significantly more competition. You never know when a new competitor might emerge or when circumstances might change. Subscription metrics can help to protect you by keeping you informed.