The subscription economy offers many advantages for business as well as for consumers. However, the mindset has to change when evaluating the success compared to one-time purchases. To make sure you are on the right track and don't get surprised by churns I want to recommend a couple of metrics to keep an eye on. Make sure to regularly track and analyze them.
MRR (Monthly Recurring Revenue)
Starting off with the most obvious new metric to track: How much revenue can you predict on a monthly basis? If you offer a product portfolio of simple subscription plans you only need to calculate the amount of subscribers by the monthly plan price.
Number of subscribers x monthly plan price
However, this can become more complex depending on other billing components, e.g. if you offer subscription periods longer than a month, if you have a usage-based subscription or if you offer many different discounts. Important: one-time fees must not be considered in this calculation.
Why should you track MRR?
Forecasting: Obviously it will tell you how much revenue you can expect for the whole year.However, making a month-on-month comparison is even more useful. It helps you to directly measure your initiatives and their success. If the monthly revenue has significantly changed, you have most likely changed something in your offering. Did you gain or lose more customers than expected? MRR is one of the best metrics to evaluate your performance.
ARR (Annual Recurring Revenue)
If you track your monthly revenue to get a short term evaluation it's most likely you would track the accumulated yearly revenue metrics too. You can do this very easily by multiplying your MRR by 12.
MRR x 12 months
Bear in mind that if you have a 12-month subscription period you will need to subtract any set-up and one-time fees.
Why should you track ARR?
At the beginning of your subscription business, in particular, you will most likely operate at a loss. It takes time to build up a sustainable subscription model if customers have the flexibility to cancel at any time depending on how satisfied they are and if your product solves their needs. Therefore, investors would want to see your predictions for the upcoming years to evaluate the health of your business.
Customer LTV (Lifetime Value)
The beauty of subscription models is that they make it easier for you to get feedback from your customers about their product satisfaction. If you can keep them for a longer period of time this would most likely mean that you are solving a problem for them. However, if they cancel their subscriptions after a shorter period of time you most likely promised them something they did not receive. Once you have figured out the average customer lifetime, you need to multiply it by your monthly subscription price.
Average Lifetime of the Customer x Monthly Subscription Price
Why should you track LTV?
Obviously you want to understand how much money you can make with your customers in the future. If you understand the value, you can see if it takes you more money to acquire a customer than you actually get out of it. As a logical consequence you'll also get a clear indication of whether you have to improve your churn rate.
Retention Rate
This number indicates how many of your customers stay subscribed to your service after they have the option to cancel a subscription. Obviously, it would be great to keep them all. This seems unlikely but you should always strive to achieve the highest number possible.
Did you know that another word for Retention Rate is Subscription Renewal Rate? I have summarized all the advantages of tracking this KPI in a separate article to provide you with more insight.
Trial Conversion Rate
I know this won’t be applicable for all of you. Not every subscription model offers their potential customers a free trial period. However, you should definitely consider this approach. If you have a great product that continuously offers benefits to your customers, you can offer them a solution to help them easily try it out. Not only is this a great way to showcase your product to many people but it also builds up trust. Potential customers always take into consideration how respectable a company appears. So how do you calculate the Trial Conversion Rate?
Number of customers who swapped from trial to paid model / Number of trial customers
Why should you track Trial Conversion Rate?
When a customer converts from a trial to a paid model, this often means you have succeeded in proving you are delivering value. However, if you see many churns it most likely means something has not turned out as expected for the customer. You might have done a good job in presenting your product but ultimately you were overpromising. Another reason could be that the customer is not willing to pay the price for the result you delivered, even though it might have been helpful. If you see a big gab in the Trial Conversion Rate, make sure to follow up with customers to better understand their decision.
Make sure to set up automated dashboards so you can quickly see the performance. If you have to manually source the numbers every time you want to look at them, your workload will quickly explode. Also, automated dashboards give you the opportunity to create alerts if one number is performing lower or above average forcing, you to take quick action. On top, make sure to look at the numbers from different perspectives.
Definitely check the current state of the KPI, but also the performance compared to last month as well as the same month of previous year. KPI dashboards can also be very helpful for setting team goals and making sure everyone is working towards the same goal. Start predicting the performance and check if you have hit your goal. Over time you will improve your gut feeling as well as your understanding of which initiatives are driving value to your goals.
Make sure the numbers are accessible for the team and find a slot where you can discuss the results altogether on a regular basis to further analyze what has had an impact on the numbers.
