The subscription-based business model is increasingly taking the centre of the stage. Subscriptions have been accepted by organisations of all sorts, from cutting-edge start-ups to conventional enterprises, to fulfil the promise of recurring revenue.
However, tracking the success of the subscription business model can be challenging. Traditional financial reporting metrics may no longer be as meaningful as they once were. Companies must examine a fresh set of indications to assure they are on the right track. Here, we discuss ten subscription metrics that are important across industries.
1. Annual Recurring Revenue
ARR, or annual recurring revenue, provides information on the revenue earned by subscribers over the period of a year. The formula for ARR is:
ARR= Basic monthly charges x 12 x Total number of clients
Let’s understand it with an example. If you have 50 clients paying $50 per month, the ARR will be 50 x ($50 x 12), which is $3,000 per year.
ARR offers the overall picture required for annual planning and reporting.
2. Monthly Recurring Revenue
Monthly recurring Revenue or MRR is a fundamental subscription billing statistic that reflects how much money a firm can anticipate to receive from subscription clients each month. The core formula for MRR is:
MRR= Total number of subscribed customers x Monthly membership charges
For instance, let’s assume you have 20 clients who subscribed to your products at $50 per month, then, MRR will be $5,000.
MRR data may be sliced in a variety of ways to provide your company with the information it requires.
3. Churn Rate
Churn rate is referred to the number of consumers who cancel their subscription within a certain time period. It indicates how quickly (or, slowly, ideally) a company loses subscribers.
To calculate the churn rate of your subscribers, the below formula can be used:
Total number of subscriptions cancelled during a period
Churn Rate = __________________________________________________________ X 100
Total number of consumers in that period
Let’s take an example. In the Quarter 1, if 10 of your 200 customers cancelled their
subscription, the churn rate will be 5 percent for that quarter.
While sometimes, churn is unavoidable, if the rate climbs beyond 4 percent, it’s worthwhile to investigate the reason, and devise a strategy to solve the problem. The growing turnover rate may potentially cause subscription fatigue, which should be handled before it is too late. Checkout our blog on “5 Ways to Handle Subscription Fatigue” to know more about it.
4. Average Revenue Per User
When a corporation has different membership tiers, the ARPU, or average revenue per user, shows how much money a company generates per member over a given time period, such as a year.
The objective of any subscription business is to improve ARPU by shifting basic customers to premium one promoting add-on sales.
5. Renewal Rate
The renewal rate is the inverse of the churn rate. It is defined as the number of subscribers renewed in a particular period. The renewal rate can be calculated as the total number of consumers or the revenue renewed in a given time period.
Total number of renewals at the end of a cycle
Renewal Rate = __________________________________________________ X 100
Total number of expected renewals in that period
Unlike churn rate, businesses seek more renewal rates as an indication of excellent client retention.
6. Conversion Rate
Conversion rate is the percentage of customers who accomplish a requested action out of the total number of customers visited. It reflects how successfully the customers of the firm progress through its sales funnel.
In a subscription-based firm, the conversion rate is usually directly related to the total number of subscribers who migrate from a free version of the service to a paid subscription. This statistic is critical for tracking the health of the firm, properly analysing the funnel, and projecting future growth.
7. Days Sales Outstanding
Subscription renewals increase payments and chances to (intentionally or unintentionally) not pay timely. DSO or Days Sales Outstanding is a metric that determines how long it takes a firm to receive the payment for a sale. DSO is a component of the cash flow or cash conversion cycle that can rise for a number of reasons.
Dunning solutions and Collections can significantly lower down the DSO and increase renewals.
8. Customer Acquisition Cost
CAC is the expense of persuading a customer to buy a product or service of a business. It helps figure out the marketing and sales activities which bring the maximum revenue and which don’t. The CAC of a firm can be calculated as:
Total expense of acquisition activities for a period CAC = __________________________________________________
Total consumers acquired from in that period
When calculating the CAC, you can also discover that email marketing generates greater value than the conference sponsorship since it attracts more consumers at a cheaper cost.
9. Earned Revenue
Earned revenue is a company’s entire income from the sale of its products and services. Revenue is regarded “earned” after the products or services have been completely delivered. The earned revenue of a business can be calculated using the below formula:
Revenue= Average cost of a service x Sales
This concept is quite specific to subscription-based businesses, as they accept the payments before or after the services have been rendered.
10. Customer Lifetime Value
Customer Lifetime Value or CLV is the amount of money expected to be spent by a customer on your products and services over the course of their lifetime. It is one of the major metrics which is measured as a component of the customer experience programs.
Businesses need to ensure that their CLV should be more than their CAC. It will help them to fine-tune their marketing and sales efforts to build long-term, lucrative client relationships.
These are the 10 crucial subscription metrics essential to measure the growth of a subscription-based business and improve its financial performance. Tracking them demands an effective billing system capable of handling large amounts of changing data in real-time.