Key subscription business metrics
Subscription-based services are experiencing monumental growth as more consumers seek more convenient ways to shop. With the rising demands for exclusive content, freemium plans, promotions, and personalized experiences, companies need to know what's driving the most success.
Understanding and monitoring acquisition, revenue, and retention metrics are vital to your business's success. These provide actionable insights, which are key to making the right decisions for growth.
Here's a compelling list of the 3 most important metrics and KPIs for subscription businesses.
Customer acquisition cost (CAC)
CAC is the estimated cost of acquiring a new subscriber, including marketing, sales, and headcount. CAC is essential for assessing subscriber ROI (return on investment). It provides visibility into acquisition campaign efficiency and helps keep marketing and sales budgets in check.
When combined with lifetime value (LTV), CAC helps to answer how much profit you get for every dollar your company puts into sales and marketing channels.
LTV that exceeds CAC means your acquisition campaigns are profitable. A good benchmark is 3:1 or better. Generally, 4:1 or higher indicates a great business model. If your ratio is 5:1 or higher, you could be growing faster and likely under-investing in marketing.
Why should you measure LTV:CAC ratio?
LTV:CAC identifies key levers you should pay attention to and pull to accelerate profitable revenue growth.
Calculating your LTV:CAC ratio is an excellent way to see if your business is in a position for sustainable growth.
LTV:CAC serves as a barometer to determine how much you should spend on marketing and/or sales to maximize your growth.
Your payback period is the average time it takes for CAC to be recouped through monthly recurring revenue (MRR).
Tracking your payback period is essential as it helps you to accurately forecast how long it will take to "payback" the cost of acquiring each customer based on the MRR.
The payback period answers questions such as:
Is my CAC on target based on how long each customer will take to reach the "break-even" point?
How long will it take to achieve payback, and what are the implications for capital?
Trial conversion rate
This metric measures the rate at which users who sign up for a free trial version of your product become paying subscribers.
It’s important to consider the trial length and the costs you'll incur by offering a free product compared to the value you'll gain from the trial users converted. Trial conversion rate can address questions such as:
How effective is my free trial at converting users to paid subscribers?
When combined with the LTV of trial subscribers that converted to paid, how successful is my trial at producing valuable subscribers?
How do free trials impact conversion to paid subscriptions?
Across the board, subscription trials are a great conversion tool. According to our Subscriber Acquisition benchmarks report, monthly plans had a 59.9% conversion rate, while annual plans converted 54.4% of users.
Monthly recurring revenue (MRR)
Monthly recurring revenue is the predictable revenue a business can expect every month–including all invoiced recurring charges, credits, and refunds from active subscriptions. It typically excludes one-time charges, taxes, and other variable fees.
Often considered one of the most valuable metrics in the subscription business model, this metric can help answer questions like:
What is the growth trajectory of my business?
Monthly recurring revenue growth
Understanding and tracking the customer events impacting MRR is key to maintaining revenue growth and identifying reasons for any revenue decline.
Your monthly recurring revenue growth can help answer questions such as:
Why is my MRR increasing or decreasing?
When combined with subscriber churn rate, am I churning my high-value clients?
Is my reactivation revenue higher during certain seasons or times of the year?
Lifetime value (LTV)
LTV is an estimate of the profit made by the average customer over the period that they remain a customer (from signup to churn).
It represents the upper limit on how much you should spend to acquire new customers–helping you make key business decisions related to sales, marketing efforts, and other important investments.
Customer lifetime value helps to answer questions such as:
Who are my most valuable and least valuable customers?
How much money should I spend to acquire new customers and maintain profitability?
How much money should I spend to support and retain a customer?
Recurly Analytics uses a discount rate of 10% in its calculations of LTV. This accounts for the fact that lifetime value is a future-looking metric, and the value of a dollar today may be worth less in the future.
Subscriber return on investment (ROI)
Your subscriber return on investment measures how much profit you receive from each of your subscribers–helping you understand the true nature of their growth and if it’s sustainable.
You might have a high LTV, but it’s only sustainable if your customer acquisition cost is lower than the customer lifetime value.
Average revenue per customer (ARPC)
Average revenue per customer tells you how much revenue is received, on average, from each of your subscribers. This metric provides a quick glimpse into the value of your subscribers and can be an indicator of overall growth.
This ratio shares a company's ability to grow recurring revenue in spite of churn.
The quick ratio indicates a company’s short-term liquidity position and measures its ability to meet its short-term obligations with its most liquid assets.
According to Investopedia, 1 is the standard. A company with a ratio of less than 1, may be unable to pay off its current liabilities in the short term. A quick ratio higher than 1, can instantly eliminate its current liabilities.
Gross margin percentage
This metric provides a measure of your business’s profitability. It’s the percentage of revenue your company retains after accounting for all the direct costs associated with making a product or providing a service.
This metric answers operational costs and efficiency questions, such as:
How much money do I have to reinvest into my business?
Are price points set appropriately based on costs?
While the calculation itself is simple, it's crucial to accurately measure the costs of goods sold (COGS) for your business. A box-of-the-month service will have a very different COGS than a SaaS or OTT company.
Subscriber churn rate
Churn rate, also known as attrition rate or turnover rate, is a critical metric in subscriptions. It’s the percentage of subscribers who canceled or didn’t renew their subscriptions in a given period.
It indicates how well your business retains subscribers and how valuable they find your product or service. The higher the churn, the more customers and revenue you lose.
Customer churn rates varies widely depending on the industry, audience, and price point. We’ve analyzed over 1,500 global subscription brands to compile comprehensive benchmarks. Subscription businesses lose 5.6% of their customers monthly–5% in B2B companies and 7% in B2C.
Calculating churn is related to how you count subscribers and activations. Learn how to better calculate churn for your business.
Churn monthly recurring revenue (MRR)
Churn MRR is the monthly recurring revenue lost due to customer cancellations.
Churn MRR is an excellent metric for companies with different price tiers. One customer can generate $10 per month, and another can generate $500.
Looking at the number of cancellations doesn’t show you the impact the cancellations have on the bottom line. Looking at churn MRR does. It adds meaning to the number of cancellations there are.
A cohort analysis involves looking at the customer segments over time to observe how their behavior changes. As it relates to subscriber retention, a cohort analysis would examine retention (and churn) over time for each group of paying subscribers that signed up in a given month.
Cohort analysis helps understand how your subscribers have changed over time. It can help you answer questions like:
Is my monthly subscriber retention rate improving over time?
Are there seasonal trends or other events (coupons, marketing campaigns) impacting my subscriber retention?
Being on top of your subscription metrics gives you deep consumer insights you can use to accomplish your most meaningful acquisition, revenue, and retention goals.
Gain visibility into the subscription KPIs that matter with the interactive analytics dashboards and comprehensive subscription reporting of Recurly. Recurly Analytics provides many reports you can customize to have a 360° view of your subscribers.