Subscription is a business model that works for any industry, from software to children’s books. For business owners, recurring subscription fees mean guaranteed money in their pocket every month. Cha-ching.
But how do you grow a subscription business? Let’s discuss five subscription metrics to steer toward sustainable growth.
What are subscription metrics?
Subscription businesses use metrics to measure progress toward growth goals. These metrics help you answer questions like “Are our numbers where they should be? Are we headed in the right direction?”.
The challenge here is that there are many, many metrics out there. It can be tempting to track each of these metrics to discover helpful information, especially if your company is just starting out.
But when it comes to metrics, less is always more.
Instead of spending time crunching numbers and worrying about all the metrics, it’s best to track a small number that focuses on your business’s revenue growth and ability to retain customers using subscription analytics software.
Why should businesses track subscription metrics?
Businesses can measure success by comparing how they stack up against other companies. Metrics are a straightforward way to do just that.
Subscription metrics cut through the noise of running a business and provide perspective into a company’s numbers at different growth stages. They also help forecast business demands.
5 main subscription metrics to track
It’s worth repeating that tracking a select few metrics is better than tracking a dozen. Aim to get tangible insights from your metrics.
When deciding which metrics to track, consider the following:
What information am I trying to find out?
What data do I already have?
How will I calculate and track this data?
1. Monthly recurring revenue (MRR) and annual recurring revenue (ARR)
Monthly recurring revenue (MRR) is recurring revenue normalized into a monthly amount. It averages different pricing plans and billing periods into a singular number you can track over time.
In other words, MRR measures how much money you can expect to make every month. It’s the lifeblood of any subscription business.
“We just hit 10K in MRR!” Sound familiar?
Annual recurring revenue (ARR) is simply MRR multiplied by twelve to reflect a yearly amount. Businesses primarily use ARR for anticipating future revenue and visualizing their size.
For example, if someone says they have a $2 million business, it most likely means they’re currently earning $2 million ARR.
MRR and ARR formulas
To calculate MRR, multiply the number of customers by your average billing amount.
MRR = Number of customers x Average revenue per customer
To calculate ARR, simply multiply your MRR by 12.
ARR = (Number of customers x Average billing amount) x 12
Why measuring MRR and ARR is important
Besides giving you a snapshot of your predictable revenue, MRR and ARR provide critical signals about how well your subscription business is growing or not. Because MRR and ARR reflect the same numbers, they’re used interchangeably.
Track performance: Most subscription companies have a goal just for MRR. After all, MRR growth is the combination of efforts from all team members, including sales, marketing, engineering, and customer success.
Guide sales efforts. MRR allows sales teams to translate the deal size they’re closing into quantifiable earnings for the company. This helps teams prioritize resources accordingly. For example, it probably makes more sense to have a sales rep spend time negotiating with a lead that would bring in $500 MRR than a lead worth $50 MRR.
Budget wisely. MRR also helps businesses manage expenses by providing leaders with revenue numbers coming in each month. With this information, they can decide how to use that revenue for salaries, product development, marketing spend, and more. Will you be able to hire another full-time employee, or does it make more sense to work with a freelancer? Can you run a paid ads campaign? The amount of revenue you're bringing in is a major factor in these decisions.
How to increase MRR and ARR
Subscription businesses always aim to increase their revenue. Below are three tried and tested ways for subscription businesses to increase MRR and ARR.
Charging more for your product is an underused strategy. Many subscription companies decide on prices early on and leave them as-is, often underpricing their subscriptions.
This is largely because pricing subscription products can be very challenging. Whether based on features, usage, number of users, or a combination of these, the perceived value of your product can be difficult to translate to a monthly amount.
A great way to experiment with higher prices is by running A/B tests. Here’s a quick example.
On your marketing site, increase your prices by 1.5 to 2x. Leave everything as-is. After four weeks, check if your conversion rates were impacted. You’d be surprised at how often both the conversion rate and the MRR increase in these tests.
Get rid of plans that allow “unlimited” usage
While pricing, you might want to avoid one subscription tier with “unlimited” usage. It all comes back to the value you’re providing your customers. Why would you offer them unlimited value but limit the amount they pay you for it?
Customers who use an unlimited plan can pay a reasonable amount for it. Charge them accordingly, or run the risk of depleting resources like customer support.
Increase expansion revenue from existing customers
Increasing revenue by retaining existing customers is remarkably less expensive than acquiring new customers. After all, these customers already use and love your product.
Revenue earned from existing customers is referred to as expansion MRR or customer expansion.
There are three ways to increase expansion MRR:
Upgrade: Upgrade customers to a more expensive plan
Cross-sell: Offer complementary products
Offer add-on features: Offer additional, smaller-scale features
Here’s a visual explaining the differences using ice cream. Unsure how to decide between these strategies? Learn more about cross-selling and upselling.
The average revenue per user (ARPU) measures your business’ revenue from active customers. ARPU focuses on earnings on a more granular, per-user basis than MRR/ARR, which looks at your company’s incoming revenue as a big picture amount.
To calculate ARPU, divide your MRR by the number of active customers within a particular month.
ARPU = MRR / Number of active customers
“Number of active customers” include your customers on a free plan (if you offer one). By including free users, the final ARPU value can help you understand if your free plan is sustainable.
The equation is the same if you calculate ARPU with just your paying customers. Divide MRR by “active, paying customers”. This value is referred to as average revenue per paying customer (ARPPU).
ARPPU = MRR / Number of active, paying customers
Why measuring ARPU is important
ARPU provides a high-level overview of how much you earn from each customer. It helps answer the question, “Does my pricing work with my operational expenses?”
If you want to get more granular, you can compare ARPU with different plans to understand each plan’s relative popularity. A positive or negative change in ARPU tells you which part of your business is growing faster.
If your ARPU is trending upward, it indicates that your customers on more expensive plans are increasing. Likewise, if your ARPU is trending downward, your customers on cheaper plans are increasing. This isn’t necessarily bad since you’re still earning revenue, which you can monitor using an operational financial model.
How to increase ARPU
Subscription businesses should always aim to increase ARPU. Here are three ways to get started.
Offer tiered pricing to attract higher-paying, long-term customers
Tiered pricing helps businesses appeal to customers with varying needs and budgets through corresponding plans. The more expensive the plan, the more value a customer gets.
Structure your pricing to draw customers to more expensive plans. After all, when customers get more features and value from a product, it’s much harder for them to cancel their subscription.
Think critically about your pricing page to draw customers to these more expensive plans. Be sure to highlight how the plan’s features benefit them and consider adding a colorful tag that says “Recommended” or “Popular” for an additional push.
UXPin’s SaaS pricing page is a great example of this. Notice how they manage to articulate:
Free and freemium plans are a surefire way to get customers to sign up for your product or service. However, they can overwhelm resources like customer support and engineering without generating any revenue when managed poorly.
If you offer a free or freemium pricing plan, make it your goal to upgrade to paid plans as many users as possible. One way to do this is by teasing the value of paid plans. CloudApp does this really well. Their free users can use all of CloudApp’s core features, but only in minimal quantities.
Imagine you’re a CloudApp free plan user, and you use the screen capture tool multiple times a day. You can only create 20 screen captures a month on the free plan. This limitation could be enough to motivate you to upgrade to the paid, individual tier.
Offer add-on features
Add-on features fill ad-hoc needs for customers on any plan, providing you with more ways to make revenue per customer.
CAC is commonly used to evaluate the performance of different marketing channels. With this information, marketers can identify the channels they should be putting more effort and resources into.
CAC can also be used to determine a business’ profitability. If your CAC exceeds the amount a customer spends on your product before they cancel (in other words, their “lifetime value” more on that later!), you have a much harder time breaking even and growing your business.
To find out if your sales funnel is working for you, try asking the following questions during each stage:
Awareness: Are we targeting the right leads at the right time?
Interest and evaluation: Do we effectively communicate our product’s unique selling points?
Desire: Do we stand out from our competitors? Do we provide enough social proof?
Action: Is our sign-up process straightforward for customers? What obstacles do they face, and how can we mitigate those obstacles?
4. Customer churn
Losing customers is an inevitable part of running a business. While it hurts to see customers leave, you should track how many are leaving. This value is your customer churn rate. Expressed as a percentage, customer churn reflects the rate by which your customers cancel their subscriptions on a month-to-month basis.
Customer churn formula
To calculate customer churn, first decide on a period. Then, divide the number of customers who churned during that time by the number of customers at the start of that period. Multiply this value by 100 to get a percentage.
Customer churn = (Number of churned customers / Number of customers at the start of a period) x 100
Why customer churn is important
Simply put, lost customers means lost revenue. Below are two key reasons why subscription companies should prioritize reducing customer churn.
Churn reveals problems in your business
An increasing churn rate can signal big-picture things that aren’t working right in your business. Common examples include product issues, poor customer support, and product-customer fit.
Product-customer fit refers to how well your product is suited for your customer needs. If you notice an increase in churn among a specific customer segment, you should reevaluate your marketing efforts and who you’re qualifying and bringing in.
Tracking churn helps you predict revenue more accurately
With a consistent churn rate, you get a more accurate understanding of your earnings and answer questions like, “Is our growth consistent month after month? Why or why not?”
Although every subscription business should expect some churn, a lower churn rate means more revenue in your pocket and good customer retention.
How to reduce customer churn
Trying to reduce churn is like fixing a stubborn leak. No matter how hard you try to fix the leak, some water always gets through.
Fortunately, you can use a handful of proven tactics to get ahead of churn and prevent it as much as possible.
Check-in with customers frequently
Your relationships with your customers don't end after they sign up for your product.
Regular check-ins help you proactively check in with your customers and solve their problems. And with the many SaaS tools that automate customer success emails, providing a personalized touch has never been easier (or faster!)
Identify customers at risk of churning and re-engage them
As part of your customer success efforts, consider establishing criteria for customers in danger of churning. To do this, monitor the previously churned customers’ activities and find patterns in their behavior.
For example, a software company’s criteria might include the following:
Customers who haven’t logged into the app for 1 month
Customers who you haven’t opened or responded to 5 emails
Customers who’ve made more than 3 complaints since they signed up
Tools like CRMs help monitor customer behavior. Once you identify a customer at risk of churning, get in touch and offer an incentive to bring them back to your product.
Ask for feedback when customers churn and use that information to improve
Let’s say you’ve already put customer success emails on autopilot and have criteria to intercept disengaged customers. And yet, customers still churn. Now what?
At this point, feedback is your best friend. By understanding why your customers leave, you can identify and prioritize areas for improvement.
As you prepare to collect feedback, keep in mind that the timing of when you ask matters. Aim to ask your customers within 24 hours of their cancellation. This way, they’re more likely to respond since it’s still top of mind for them.
Like customer success emails, you can also automate cancellation feedback.
After gathering enough responses, you can evaluate which reasons garner the most cancellations. Here are some example insights you could draw from trends in this data:
“Technical issues” refers to product issues that engineering resources can address.
“Not sure how to use the data and tools” could indicate gaps in your customer onboarding process.
“Switching to another product” can clue you into what your competitors are succeeding at and inform your future roadmap.
5. Customer lifetime value (CLV)
Customer lifetime value (CLV) or LTV is the predicted amount a customer spends on your product before churning. LTV helps you see your customers’ long-term value compared to other metrics.
How to calculate customer lifetime value
The simple formula for CLV takes your average revenue per user and divides it by your customer churn rate.
CLV = ARPU / Customer churn rate
As a general rule, the higher your customer churn, the lower your lifetime value. That’s why it’s crucial to monitor both!
Why measuring CLV is important
Subscription businesses primarily use CLV to evaluate spending and target customers.
CLV and CAC
When you know your CLV, you can calculate how much you can afford to spend to acquire new customers. Look at CLV as a ratio with customer acquisition. For subscription businesses, a ratio of CLV to CAC ratio of 3:1 is considered ideal.
If your ratio is above three, then the amount you spend acquiring new customers outpaces their lifetime value. To put it another way, you’re spending too much.
CLV helps you identify ideal customers
When you know CLV for all of your customers, you can identify those with the highest value. With this information, you can adapt your customer acquisition strategy to find similar companies.
Churn variances and what to look out for when calculating CLV
It’s worth noting that when modeling CLV in statistical settings, it’s common for the CLV estimates to be off by as much as 50%.
This is because the churn metric itself is sensitive to changing populations, even though the number of customers has nothing to do with a lifetime value of an individual customer.
TLDR: CLV isn’t always 100% accurate. It’s best used as a big-picture financial health barometer: Is CLV increasing or decreasing?
How to increase CLV
Now that we’ve discussed why CLV is an important metric as well as its drawbacks, let’s talk about ways to increase CLV.
Compare CLV by customer segment
Again, CLV isn’t a perfect metric. But it can guide you to high-value customers.
One way to do this is by breaking down CLV by customer segments. For more subscription businesses, customer segments often refer to the plan type they’re paying for.
These numbers are pretty standard for a software-as-a-service (SaaS) company this size. Their lowest plans have significantly less LTV, despite having the most customers.
Generally speaking, customers on lower-priced plans tend to churn more and pay less. Customers on higher-priced plans tend to stick around longer and generate more revenue. This suggests that it’s probably smart to prioritize medium-large-sized customers in prospecting.
Interview your customers with the highest CLV
Once you identify customer segments with the highest CLV, you can talk to them and learn why they stayed.
Here are some questions to get you started:
How they use your product
Who on their team uses your product
How they found out about you
How they’ve grown with your product since they signed up
Given that ARPU is part of the CLV metric, it makes sense that a higher ARPU means higher CLV.
As a recap on ARPU, three ways to increase ARPU include:
Offering tiered pricing to attract higher-paying, long-term customers
Optimizing free or freemium options
Offering add-on features
Template for tracking your business’ subscription metrics
You can track subscription metrics with spreadsheets if you’re familiar with standard spreadsheet functions. Another option is to use subscription metric tracking tools. These tools help you calculate metrics using your payment provider data and accurately track the key performance indicators (KPIs).
Running a subscription business is no easy feat. With so many decisions to make every day, you need data to guide sustainable growth.
MRR, ARR, ARPU, CAC, customer churn, and CLV are five essential metrics to include in your data toolkit. Focusing on these five metrics helps you increase scalability, retain high-value customers, reduce churn, and more.
Lea is a content marketer at Baremetrics and producer of the Founder Chats podcast. She's passionate about impactful businesses, and the stories founders have to tell. When Lea’s not writing about the SaaS industry, you can find her trying new recipes in her tiny Tokyo kitchen.
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