Subscription Metrics

What are Subscription Metrics?

Subscription metrics are the quantifiable performance measures for a company’s subscription business model. Depending on how much revenue a company derives from its subscription revenue streams, subscription metrics could measure a portion or the entirety of the company’s performance.

There are several subscription metrics, each of which quantifies one or more of the following:

• Customer acquisition efforts
• Customer retention initiatives
• How much a certain customer (or customer type) spends
• The amount of time that customer can be expected to stay with the company
• Profitability and revenue growth, both short-term and long-term

Subscription metrics are helpful for companies because they simplify abstract concepts (e.g., “How are customers responding to our new product?”) into tangible numbers. This makes it easier for companies to track and adjust their subscription growth strategies as needed.

Synonyms

• KPIs for subscription businesses
• Revenue metrics for subscription companies
• Subscription business model metrics

Why Track Subscription Metrics

1. Inform pricing strategies

Companies using subscription-based pricing models should track subscription metrics because they provide key insights into the effectiveness of their pricing strategies.

In general, subscription services are the best source of predictable revenue, but they can also be very sensitive to pricing changes. By tracking subscription metrics, companies can experiment with different strategies and optimize their pricing and revenue over time.

2. Make accurate revenue forecasts

Leaders, executives, and investors rely on revenue forecasting to determine whether or not to invest in team growth, regional expansion, and new product development.

When they have quantifiable historical data to guide their decisions, the forecasting process becomes much easier. Subscription metrics provide companies with valuable insight into their future revenue potential and enable them to make more informed decisions.

3. Improve customer experience

Tracking subscription metrics alongside customer feedback data can help companies identify areas of improvement in the user experience (UX). They can track how their customers interact with their product or service, which could indicate any UX issues that need to be addressed.

Companies can also use subscription metrics to track pricing and promotion strategies to see which ones are most effective in driving customer loyalty and engagement. When they double down on the ones producing the best results, the result is a better customer experience.

4. Drive product and feature development

Assuming a company works with just one developer and designer to implement a new feature (which is rarely the case), they’re still looking at an investment of up to $300,000 for any new SaaS feature.

Subscription metrics can tell them which of their products or features generate the most revenue and which ones are falling short.

When coupled with customer feedback regarding what they’d like to see out of the product, this information drive product and feature development decisions and show companies which features to cut.

5. Optimize marketing campaigns

Selling a subscription product is largely a learning experience requiring businesses to figure out which subscribers respond well to certain messaging or use the product successfully.

Subscription KPIs help businesses refine their ideal customer profile (ICP) by providing insight into which channels are the most successful in driving conversions and which subscribers have the highest revenue potential.

When they target segments that show the highest revenue per subscriber or the highest lifetime value, their marketing efforts will be more targeted and worthwhile.

6. Plan for sustainable growth

Subscription companies often fall into the trap of selling to too many different kinds of customers. In reality, long-term growth potential is much higher when companies focus on a specific target market and build on their subscriber base from there.

Key performance indicators help them approach this issue holistically — sales, marketing, and customer success efforts can meet subscribers right where they are while product developers can add the right features and improvements to keep high-value subscribers happy.

7. Communicate with investors

Only around 0.05% of companies raise venture capital, but plenty of subscription-based businesses require some sort of outside investment throughout their growth journey.

Regardless of the investment source, subscription metrics make communication with the members behind it considerably easier.

• Historical data makes it easier to make sales projections.
• Subscriber ROI data helps investors understand the future potential of a new market entry or product development initiative.
• Churn rate improvements and high renewal rates indicate an investable company.

Whether an organization is pitching new investors for the first time or maintaining an ongoing relationship with them, subscription metrics make their job less stressful.

12 Key Metrics for Subscription Business and Why They’re Important

1. Monthly Recurring Revenue (MRR)

Monthly recurring revenue (MRR) is the ongoing metric central to a subscription business. Although it doesn’t highlight the complete picture of a company’s financial performance, its benefits are twofold.

• MRR helps companies plan for the short term. Month to month, businesses can look at their MRR to gauge the impact of recent marketing and sales initiatives on their bottom line.
• They can use MRR to plan for long-term growth. Looking at MRR historically, companies can plan for periods of lower revenue growth, make accurate sales forecasts, and implement effective strategies for scaling.

2. Annual Recurring Revenue (ARR)

Although yearly financial statements provide a basic overview of a company’s performance, analyzing annual recurring revenue (ARR) offers more extensive information about business trends and customer behavior.

Companies prioritize monthly revenue over ad hoc sales, but ARR guarantees revenue for an entire year. Zooming out also gives businesses more insight into retention rates, as MRR won’t identify a high customer churn rate as easily.

3. Average Revenue Per User (ARPU) or Average Revenue Per Account (ARPA)

Understanding how much revenue the average subscriber brings in is important for understanding company profitability. 

Measuring average revenue per user (ARPU) gives companies two critical pieces of information:

• How long it will take to recoup the cost of selling a subscription
• How much revenue they can expect from each subscriber in the long run

In terms of business finance, this plays a vital role in the larger profitability equation.

Suppose a SaaS subscription business sells software packages starting at $500 per month. When factoring in sales infrastructure, customer support, and marketing costs, the overall cost of selling each subscription winds up being $1,500.

In the example above, the company would need to retain its subscribers for three months and have an ARPU of $1,500 to break even (and more to be profitable). If one customer segment it targets is breaking even or costing the organization money, its leaders can cut their losses and focus on more profitable customer segments.

Of course, the above hypothetical doesn’t factor in all the costs of running a business, but it demonstrates how a company might use ARPU to determine whether a sales channel, marketing channel, or customer segment is worth pursuing long-term.

4. Customer Lifetime Value (CLV)

Customer lifetime value (CLV) measures the total amount of money a subscriber will spend with a company over their lifetime.

It helps companies make better marketing decisions, understand the potential of certain customer segments, and discover opportunities for product development. It also gives organizations a more detailed look at recurring revenue, which only gives a snapshot of business performance.

CLV is calculated by multiplying average revenue per user (ARPU) by its expected customer lifespan. For example, if a SaaS company’s ARPU is $500 and customers renew their subscription for two years on average, its CLV would be $1,000.

Understanding CLV is important because acquiring a new subscriber is five to seven times more costly than retaining an existing one.

5. Customer Acquisition Cost (CAC)

Adding new active customers to the subscriber base doesn’t automatically mean more profits, which is why companies measure their CAC.

Customer acquisition cost (CAC) shows organizations which marketing and sales efforts are worth the investment and which are costing them too much money.

The ideal customer isn’t necessarily the one with the lowest acquisition cost — companies need to look at a subscriber’s lifetime value and divide it by their CAC to determine their overall ROI.

Called the CAC:LTV ratio, this indicates a company’s profitability and gives them insight into how their customer acquisition efforts can be improved over time.

6. Churn Rate

Measuring subscription churn tells businesses how many customers are leaving their services and why. It’s calculated by dividing the number of lost subscribers in a given period by the total amount of active subscribers at the start of it.

Subscription churn tells businesses three things:

• How many customers are leaving
• Which subscription services are seeing the most churn
• Which customer segments are seeing the highest number of cancellations

Successful subscription businesses in the SaaS industry generally have a churn rate of between 10% and 14% while the average churn rate for subscription services overall should be around 6% to 8%.

7. Growth Efficiency

The Growth Efficiency Index (GEI) measures how much it costs for a subscription business to generate $1 in net ARR. A value under 1.0 indicates revenue optimization, while GEI values over 1.0 indicate a need for improvement in revenue acquisition.

To calculate growth efficiency, divide the current year’s marketing and sales expense by net new ARR.

The GEI tells companies how much they need to spend to achieve $X in new ARR for the next year. It takes into account all the costs associated with sales, marketing, and customer service — from the cost of acquiring customers to the cost of onboarding them.

Using this metric, companies can measure their performance against industry averages, compare pricing models, and identify opportunities for improvement in their subscription process.

8. Lead Velocity Rate (LVR)

Lead velocity describes the speed at which potential customers move through the sales pipeline. Lead velocity rate (LVR) measures the real-time growth in the number of new leads month-to-month.

For subscription businesses, LVR is one of the most important metrics to monitor — it directly highlights sales efficiency and success of customer acquisition strategies.

The higher the lead velocity rate, the quicker a business can acquire new customers. To calculate LVR, first subtract the previous month’s lead count from the current month’s lead count. Then, divide that number by the previous month’s leads to find the change in percentage points.

9. Subscriber Return on Investment

At its core, subscriber ROI is a simple formula — money gained from a subscriber minus the money spent, divided by the money spent.

It measures the profitability associated with acquiring a new customer, as well as how effective a company’s marketing efforts are in terms of bringing in new subscribers.

Subscriber ROI can also be used to compare different sales channels or customer segments, helping businesses identify the most profitable and cost-effective ways of generating new subscribers.

10. Trial Conversion Rate

Most subscription services offer trials before forcing the customer to make a purchase decision.

A low trial conversion rate could mean several things:

• The product didn’t meet customer expectations
• The communication around the product is insufficient
• The potential customer wasn’t a fit for the product
• The pricing model doesn’t justify the value

The trial conversion rate shows how successful these trials are in terms of driving sales and allows businesses to track their progress over time.

It’s calculated by dividing the number of customers who convert from free trials to paid subscriptions by the total number of people who signed up for a free trial during that period.

11. Renewal Rate

The subscription renewal rate is the percentage of customers who renew their subscription to a service or product. It tells businesses how successful they are in retaining their customer base, as well as which services and products are most sought-after by returning subscribers.

A high renewal rate indicates loyal customers find value in the offering. It’s also an indication of healthy cash flow and long-term sustainability.

Companies with low renewal rates need to take a closer look at their targeting, pricing, customer experience, and product offerings in order to make sure their offers are meeting customers’ needs.

12. Revenue Churn

Revenue churn is different from subscription churn because it takes into account the amount of revenue lost instead of just the number of customers. A high subscription churn rate might be less important if the customers with the highest ARPU aren’t the ones leaving.

For subscription-based businesses with multiple pricing models, revenue churn is more telling of company financial health than subscription churn.

Strategies to Improve Subscription Performance

There are seemingly endless ways comapnies improve their subscription metrics. To some degree, the complete set of strategies is unique to the business, and depends on the underlying causes of issues.

There are a few general strategies that apply to most businesses:

• Drive user adoption by focusing on user onboarding and product engagement.
• Offer incentives to encourage customers to renew subscriptions or upgrade plans.
• Develop more effective upsell/cross-sell tactics.
• Incrementally test different pricing models to understand price elasticity.
• Invest in customer retention programs, such as loyalty rewards or referral incentives.
• Re-evaluate the lead acquisition process to ensure leads are qualified and high quality.
• Collect feedback from customers after all types of churn and throughout the customer journey to identify any pain points in the subscription process.

Tools to Track Performance of Recurring Revenue Businesses

CRM

Customer relationship management (CRM) software tracks leads throughout the sales pipeline and stores updates and notes. It gives businesses visibility into their customer data and helps them identify churn points, so they can target initiatives to reduce churn and increase customer lifetime value.

Throughout the customer journey, CRM also gives organizations the ability to automate tasks and manage customer communication from onboarding emails to renewal notifications.

Customer success teams enter conversation data into CRM after solving customer issues, which can underscore critical pain points.

Configure, Price, Quote (CPQ)

CPQ software streamlines the entire sales process by making it easier for sales reps to customize proposals and generate quotes. It can be used to develop pricing models for different customer segments, as well as set up product bundles and discounts.

CPQ enables sales reps to quickly filter through customer data and find the right solution that meets their prospect’s needs. This increases conversion rates from free trials to paid subscriptions and helps businesses increase their lead velocity rate.

Billing

For comapnies using a subscription revenue model for some or all of their products, billing software handles the entire customer life cycle from signup to renewal, and has important features like automated invoicing and payment processing that make the subscription process easier for customers.

A subscription billing platform also allows businesses to deliver different pricing plans tailored to specific segments or channels, so they can identify segment-specific retention rates and optimize their marketing efforts.

Revenue Intelligence

CRM, billing, and subscription management collect customer data, but they don’t provide insights into how the business is performing.

Revenue intelligence allows businesses to collect and analyze sales data from different sources in one place. This gives them the ability to track key performance indicators like renewal rates, trial conversion rates, and churn rates over time.

Subscription Management

Subscription management software handles current customers, their payment information, and billing cycles. It can also be used to track customer preferences, so businesses can tailor offers that will renew subscriptions and increase revenue.

Automating these processes ensures on-time payments, engaged customers, and fewer customer support requests while reducing the workload for the customer success team.

Subscription Analytics Software

Subscription management platforms sometimes have analytics built in, but analytics platforms are also available as standalone software. These platforms give businesses the ability to visualize their data, so they can understand trends and make informed decisions about pricing and product offerings.

Subscription analytics software provides insight into customer behavior, such as what features customers are using and which ones they’re not. It can also help stakeholders make decisions about where to invest future resources.

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