Subscription Business Model Metrics Guide

A guide to understanding and monitoring key performance metrics for subscription businesses.

Subscription model businesses are experiencing monumental growth as more consumers adopt subscriptions. With that growth comes the need to measure subscriber acquisition costs, customer lifetime value, subscriber churn, MRR, and a number of other important subscription business model key performance indicators and metrics. 

With rising demands from consumers for free trials, promotions, exclusive content, and data-backed personalized experiences the pressure is on for subscription brands to know what's driving the most success in order to grow the business in scalable and sustainable ways.

We recommend that every subscription business understand and monitor key subscription metrics related to acquisition, revenue, and retention. Metrics provide insights based on data, and they are the key to making the decisions that will support strong growth.


Acquisition Metrics 

Customer Acquisition Cost (CAC)

CAC is an estimate of the cost associated with acquiring a new subscriber. It includes the costs associated with acquiring a customer, including marketing, sales, and headcount.

How do you measure customer acquisition cost?

CAC =
Costs spent acquiring new customers
Customers acquired in the period the money was spent

Why should you measure customer acquisition cost?

CAC is important for assessing Subscriber ROI (Return on investment) since costs impact profit. It also provides visibility into acquisition campaign efficiency and helps keep marketing and sales budgets in check. When combined with LTV, CAC helps to answer questions such as:

  • How effective are my sales and marketing efforts?

  • When combined with LTV, am I spending too much to acquire customers in relation to what they’re worth?

  • Can I monetize subscribers at a higher rate than it takes to acquire them?

  • How long will it take to achieve payback and what are the implications for capital?

CAC varies widely across industries and business types. Hubspot has good benchmarks to provide you a baseline for customer costs.

LTV:CAC Ratio

CAC: LTV Ratio is used to approximate return on investment (ROI) for customer acquisition. According to a recent Forrester report, "LTV:CAC is a ratio that measures the relationship between the lifetime value of a customer and the costs of acquiring that customer. Put more simply, the ratio expresses how much profit is generated for every dollar the company puts into the sales and marketing machine. Healthy subscription businesses should aim for a 3:1 LTV:CAC ratio, or greater than $3 of profit generated for every $1 of costs to acquire the new logo."

According to Gekoboard, For growing SaaS companies, the industry standard for this ratio is 3X or higher - since a higher ratio means your sales and marketing have a higher ROI. A ratio of 1:1 means you lose money the more you sell. A good benchmark for LTV to CAC ratio 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 are likely under-investing in marketing.

How do you measure LTV:CAC Ratio?

LTV:CAC Ratio =
LTV
CAC

Why should you measure LTV:CAC Ratio?

  • LTV:CAC identifies key levers you should pay attention to and pull to accelerate profitable revenue growth.

  • You should monitor how much it costs to acquire new customers because higher costs can drive up CAC and make the ratio less attractive.

  • 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.

Payback Period

The Payback Period is the average time it takes for CAC to be recouped through MRR (Monthly Recurring Revenue)

How do you measure the Payback Period?

Payback Period =
CAC
ARPA x gross margin %

Why should you measure the Payback Period?

The Payback Period is important as it helps you to be able to accurately forecast how long it will take to "payback" the cost of acquiring each customer based on the MRR (Monthly Recurring Revenue).

The Payback Period helps to answer questions such as:

  • Is my CAC on target based on how long it will take each customer to reach to "break-even" point?

  • Can I monetize subscribers at a higher rate than it takes to acquire them?

  • How long will it take to achieve payback and what are the implications for capital?

Trial Conversion Rate

Trial Conversion Rate is the rate at which people who sign up for a free trial version of your product or service become paying subscribers.

How do you measure trial conversion rate?

Trial Conversion Rate =
Subscription trials started in month Z that convert to paying customers
Subscription trials started in month Z

 

Why you should measure trial conversion rates?

It’s important to think about the trial length and the costs you'll incur by offering a free product or service compared to the value you'll gain from the percentage of trial users who convert. 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, conversion rates for subscription trials perform well. In our study, industries that were above the overall median rate for trial conversions included Consumer Services and SaaS, with median conversion rates of 66.8% and 62.4%, respectively.

Trial Conversion Rate chart

Revenue Metrics 

“Numbers can be scary if you don’t have a finance background. But Recurly really helps even the least finance-literate user to get the real story without trouble.”

Daniel Figueiredo,  Sales & Support Project Analyst, Pipedrive

Monthly Recurring Revenue (MRR)

Monthly Recurring Revenue is the predictable revenue a business can expect on a monthly basis; includes all invoiced recurring charges, credits, and refunds from active subscriptions. It typically excludes one-time charges, taxes, and other variable fees.

How do you measure MRR?

MRR = Sum of all recurring revenue for the month, including gains and losses

Why you should measure MRR

Often considered one of the most valuable metrics for a digital media subscription business, this metric can help answer questions like:

  • When compared to previous months, what is the growth trajectory of my business?

  • How is customer acquisition or churn impacting my revenue?

Monthly Recurring Revenue (MRR) Growth 

Understanding and tracking the customer events that impact MRR is key to maintaining revenue growth and/or identifying reasons for any revenue decline.

MRR Growth measures the change in that month’s recurring revenue and can be broken down into the following components:

New MRR MRR gained from new accounts with a new subscription
Expansion MRRMRR gained from accounts upgrading or otherwise contributing more MRR today than they did yesterday
Reactivation MRRMRR gained from accounts that have churned completely and then returned with a new subscription.
Churned MRRMRR lost from accounts that have churned their last or only subscription
Contraction MRRMRR lost from accounts downgrading subscriptions or otherwise contributing less MRR than yesterday
Net MRRNew MRR + Expansion MRR + Reactivation MRR - Contraction MRR - Churned MRR

Monthly Recurring Revenue 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 customers?

  • Is my reactivation revenue higher during certain seasons or times of the year?

Lifetime Value (LTV)

LTV is an estimate of the profit made from the average customer over the period that they remain a customer (from signup to churn).

How do you measure LTV?

LTV =
Average revenue per customer × Gross margin percentage
Customer churn rate

Note: Recurly Analytics uses a discount rate of 10% in its calculations of LTV. This is to account 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.

Why you should measure LTV

Customer lifetime value is an important metric as it represents the upper limit on how much you should spend to acquire new customers. It helps digital publishing businesses make key business decisions related to sales, marketing, and other important investments. It helps to answer questions such as:

  • Who are my most valuable customers and my least valuable customers?

  • How much money should I spend to acquire new customers and still maintain profitability?

  • How much money should I spend to support and retain a customer?

“Recurly gave us the flexibility to play with the plans and with the promotions,” said Zvaifler. “Having that built-in has helped us test and learn what combination of promotions, marketing channels, and term length equate to the highest LTV. We couldn’t have done that without Recurly.”

Ben Zvaifler,  Founder, PupBox

Subscriber Return on Investment (ROI)

Subscriber Return on Investment metric measures how much profit is received from each subscriber.

How do you measure Subscriber ROI?

ROI =
Lifetime value
Customer acquisition cost

Why you should measure Subscriber ROI

ROI helps subscription businesses 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 customer.

How do you measure ARPC?

ARPC =
Total revenue for the month
Subscribers contributing to that revenue

 

Why you should measure ARPC

Average Revenue Per Customer provides a quick glimpse into the value of your subscribers and can be an indicator of overall growth when increases are seen. Keep in mind that a few large customers can greatly impact the average, so it’s also useful to look at the range of revenue contributed by each customer. ARPC helps to answer questions such as:

  • If my ARPC is decreasing, are my customers likely to churn?

Our partners at ChartMogul explain that one way to figure out what a good number is to find the ARPU of your competitors and see how you stack against them.

ARPU chart for Ultimate Metrics Guide

Quick Ratio

A measure of a company's ability to grow recurring revenue in spite of churn. Sometimes referred to as growth efficiency. An estimate of the average cost to acquire a new customer.

How do you measure the Quick Ratio?

Quick Ratio =
New business MRR + Expansion MRR
Churned MRR + Contraction MRR

Why you should measure the Quick Ratio

The quick ratio is an indicator of a company’s short-term liquidity position and measures a company’s ability to meet its short-term obligations with its most liquid assets. 

Quick Ratio helps answers questions such as:

  • The quick ratio indicates a company's capacity to pay its current liabilities without needing to sell its inventory or get additional financing.

  • The quick ratio is considered a more conservative measure than the current ratio, which includes all current assets as coverage for current liabilities.

  • The higher the ratio result, the better a company's liquidity and financial health; the lower the ratio, the more likely the company will struggle with paying debts.

Investopedia says a result of 1 is considered to be the normal quick ratio. ... A company that has a quick ratio of less than 1 may not be able to fully pay off its current liabilities in the short term, while a company having a quick ratio higher than 1 can instantly get rid of its current liabilities.

Gross Margin Percentage

The percentage of revenue the company retains after accounting for all the direct costs associated with making a product or providing a service.

Gross Margin Percent =
Subscription revenue - cost of goods or services
Subscription revenue

This metric provides a measure of a business’ profitability. This metric indicates whether sales are sufficient to cover direct costs and is an important signpost to profitability. While the calculation itself is simple, it's crucial to measure costs of goods sold (COGS) accurately for your business. A box of the month club will have a very different COGS than a SaaS business or an OTT business. 

This metric answers questions around operational costs and efficiency, such as:

  • How much money do I have to reinvest back into my business?

  • Are price points set appropriately based on costs?

Subscription businesses use these key metrics to understand exactly how their business is performing so they can make the decisions that will build their customer base, improve plan performance, and profits—critical factors that enable business growth and success.


Retention Metrics 

“Anytime we decide to offer a new subscription product or service, with Recurly, we can look and see how the churn rate has responded over time and know if the new offer is working or not. This is, I think, just the first step down a path of really amazing reporting. I'm really excited to see where Recurly’s analytics will take us.”

Andrew Seidman,  Head of Operations, Digital Reach

Subscriber Churn

Subscriber Churn is the total number of subscribers that have ended their subscriptions over a selected time period, usually separated by expiration reason: voluntary or involuntary. Churn can be shown as a number or percentage.

How do you measure subscriber churn?

Subscriber Churn Rate =
Subscribers who have churned in the month
Subscribers at the beginning of the month
× 100

Why you should measure subscriber churn?

Your subscriber churn rate is an indication of how well your business retains subscribers. Often subscriber churn is an indication of how valuable subscribers find your product or service. Subscriber Churn can answer questions such as:

  • How many subscribers actively canceled their subscriptions (voluntary churn)?

  • How many subscribers were lost due to failed payments (involuntary churn)?

  • Given the different causes for these two types of churn, where do I need to focus my customer retention efforts?

“Churn is, naturally, one of our most critical metrics because our business’ growth is dependent on acquiring new customers. But the larger we get, retention and the growth of our existing customer base are equally important. So, best-in-class dunning and an effective means to ensure successful payments on every invoice are critical capabilities. And to be scalable, we need to do all this in a low-touch way. Recurly is an invaluable tool for us in these efforts, providing key information and tools to our sales team. This enables them to solve customers’ problems and ultimately increase our subscriber base.” -

Andrew Eisele,  CFO, JW Player 

How does my subscriber churn rate compare?

Churn Rate B2B/B2C

Churn MRR

Churn MRR is the amount of monthly recurring revenue lost due to customer cancellations.

How do you measure Churn MRR?

Churn MRR =
MRR at beginning of month
MRR lost that month — upgrades from existing customers

Why you should measure Churn MRR

Churn MRR is an excellent metric to track for businesses that have different price tiers with customers paying different amounts. For these businesses, all customers are not created equal and one customer isn’t worth the same as the next. One customer can generate $10 per month, another can generate $500 per month.

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.

blog-cta-minimize churn maximize revenue guide

Cohort Analysis

A cohort analysis involves looking at the groups of subscribers, 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

Why you should examine cohort analysis

A cohort analysis is useful for understanding 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) that have impacted my subscriber retention?

Conclusion

Being on top of your key subscription metrics gives you deep insight into your business and what you can do to accomplish your most meaningful acquisition, revenue, and retention goals for your subscription model business.

To see subscription metrics at-a-glance, check out our Subscription Metrics SaaS cheat sheet.

Contact us to learn more. 

Download the PDF: Key Metrics for Subscription Commerce

Guide to Subscription Commerce
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