Subscription businesses are all the rage in today’s market. From the standard model of cell phone service and gym memberships to newer versions like weekly dinner kits and home-delivered massages, there’s something for everyone. Subscription box businesses have gained such popularity that there are several online platforms that have started with the sole intent of supporting them.
Making the decision to start a subscription business involves some reflection. You’ll need to take a look at the products or services your business offers to see if they fit the subscription model. This earlier post on subscription billing will walk you through some questions to consider.
As with any business (subscription or otherwise), it is critical to measure the performance. Tracking key performance indicators, or KPIs, will help you determine where your business is succeeding and where you could make some improvements.
Because of the nature of subscription businesses, there are specific KPIs that give the most complete performance picture. Here are the five critical questions to ask and their associated KPIs regarding your subscription business.
How much is my subscription business bringing in per month?
The amount of revenue your subscription business brings in on a monthly basis is called Monthly Recurring Revenue, or MRR. MRR is core to your business, and allows you to create the basis for many other metrics. This is a relatively easy metric to calculate - simply add up all revenue brought in each month for the subscription part of your business.
For example, Jennifer sells a monthly subscription box of artisanal cheeses. She has 22 customers in July. Jennifer has 3 cheese box types - small ($50), medium ($75), and large ($100). 15 customers have a subscription to the small box, 5 customers have the medium box, and 2 customers have the large box. Here’s the breakdown:
15 of Jennifer’s customers pay $50/month. 15 x $50 = $750.
5 of Jennifer’s customers pay $75/month. 5 x $75 = $375.
2 of Jennifer’s customers pay $100/month. 2 x $100 = $200.
Jennifer’s total MRR is $750 + $375 + $200, or $1,325.
As with your personal income, the goal is to increase MRR over time. Setting goals to increase MRR by a certain percentage each month will help you grow your business. Let’s say you set a goal to increase MRR by 5% every month for 6 months.
Review MRR each month to determine if you are exceeding, meeting, or not meeting your goal. If you increase MRR by 10% each month for 3 months, it may be time to increase your monthly goal to 10% (or higher).
If you are consistently coming in under the 5% increase goal, you may want to reevaluate your goal or look at other reasons why your business may not be increasing MRR.
How many customers are cancelling their subscriptions each month?
The percentage of your total customer base that cancels their subscription for any given month is called the Churn Rate. To determine your business’s churn rate, take the number of customers who cancelled for a specific month, and divide that number by the total number of customers at the beginning of the month.
Jennifer had 25 customers in June. Three of her customers cancel their subscription box in July, so now she has 22 customers. Jennifer’s churn rate is 3 ÷ 25, which equals .12, or 12%. For July, Jennifer has a 12% churn rate.
The goal is to keep the churn rate low, as that means your business is retaining as many customers as possible. If your churn rate is higher than you’d like it to be, there’s a good deal you can to do to improve it. Start by contacting the customers who have cancelled their subscriptions to understand why.
Jennifer may reach out to all three customers and learn that they cancelled their subscriptions due to summer travel and plan to reinstate them in September. She might decide to offer customers a way to pass on delivery for a given month without cancelling their subscriptions, and simply add extra cheeses in later months.
She might also make an announcement to all existing customers so they know they can stop delivery intermittently, and avoid future customer loss as well. Monitoring the churn rate offers you a targeted way to improve your business.
How much does each customer bring to my subscription business each month on average?
The amount of revenue each customer pays for your subscription service per month on average is called Average Revenue Per Customer/User, or ARPU. To determine ARPU, take the MRR and divide it by the number of subscription customers you had that month.
In the example above, Jennifer has an MRR of $1,325 for July. She has 22 customers who pay her varying amounts depending on the subscription box they choose. To determine her ARPU, divide $1,325 by 22 to get $60.23.
In order to grow your company’s overall revenue, you’ll need to increase ARPU over time. Try setting goals similar to MRR goals, to see how much you can increase ARPU during specific time periods.
These goals will need to coordinate with strategies to increase your monthly fee, or add options to upsell or cross-sell to customers. Jennifer has already built in way to increase her ARPU by offering 3 different types of cheese boxes.
She can experiment with marketing tactics to new and existing customers to see if she can increase the percentage of customers buying the medium and large boxes. She can also create add-ons to her cheese boxes, such jams, nuts or cheese boards that customers can add to their order.
How much am I paying to bring in each new customer on average?
The amount of money your business spends to acquire new customers on a monthly basis is called the Customer Acquisition Cost, or CAC.
Add up all the expenses your business incurs on a monthly basis to bring in new customers. Examples are the costs of marketing and sales staff, email marketing tools, direct mail costs, and advertising fees.
Take that number and divide it by the number of new customers you acquired that month. Jennifer’s marketing and sales expenses are pretty low - she uses an email provider to market to customers, has a website where customers can purchase her product, and frequently posts on social media. Her monthly sales and marketing costs for August were $50 and she acquired 2 new customers, so her CAC for August is $25.
Businesses strive to keep customer acquisition costs as low as they can while still bringing in a steady stream of customers. However, companies still have to spend money to make money. The most actionable way to look at customer acquisition cost is to break it down by channel.
Looking at how many customers were acquired by email marketing, social media, or direct mail can help you narrow down the most effective marketing tactics. If direct mail is the least effective of the three tactics, you might consider dropping it from your marketing strategy or reducing it drastically, which will reduce your costs as well.
How much will each customer pay during the duration of their subscription?
The total amount of revenue your business expects to receive from a customer is called Lifetime Value, or LTV. There are a number of ways to calculate LTV that can factor in every type of cost incurred by your business.
Start with the easiest version first, and then decide if you’d like to add layers of complexity over time. To calculate your simplest LTV, take the average length of a customer subscription and multiply it by ARPU.
Going back to Jennifer’s cheese subscription, her average subscription length is 24 months and her ARPU is $60.23. 24 times $60.23 is $1,445.52, so there’s the LTV for her business. Jennifer can also go back and calculate her sales and support costs and subtract them from her customer’s LTV to make sure she’s making a profit.
LTV provides another way to learn more about patterns in your business. If you compare Jennifer’s cost per acquisition (CAC) to her LTV, she pays $25 to a acquire a customer that will on average have an LTV of $1,445.23.
She can also calculate her LTV specific to the marketing channel she used. Do customers who receive email marketing have a higher LTV than those that came through social media? If so, she may decide to focus her efforts on that channel.
Now that you know the most impactful KPIs to the subscription business, how do actually get to this data? The accounting software you’re using to track income and expenses may have some reporting functionality that will allow you to pull reports with these metrics.
If you’re using an online invoicing tool, you may have access to these types of reports as well. You might also have the ability to plug into a subscription billing analytics tool like Baremetrics or ChurnSpotter.
If none of these options fit your needs, you can always export data from your billing systems and drop it into a spreadsheet. There you can manipulate the data according to your preferences and decide later on the tool that’s best for your business.
Subscription businesses may seem easy to put on auto-pilot. They provide a consistent revenue stream - if they are constantly monitored and optimized to keep costs low and customers happy. Regular measurement of KPIs can help make (and keep) your subscription business a profitable one.