Subscription businesses rely on recurring revenue, which means keeping happy customers and tracking some key metrics to maintain profit margins strong. There are some indicators of your subscription business health, and without these, it would be hard for you to track what's working and what's not. At Firmhouse, we recommend monitoring the following 7 metrics that all subscription businesses should know to understand better how their business is performing.
1. Churn Rate
2. MRR (Monthly Recurring Revenue)
3. ARR (Annual Recurring Revenue)
4. CLTV (customer lifetime value)
5. CAC (Customer acquisition cost)
6. Retention Rate
7. Trial conversion rate
The churn rate is an important metric to keep an eye on. The churn rate is the percentage of your customers who leave over a period of time, divided by the total number of customers.
The less you measure this metric, the more you'll be struggling with having happy customers.
Churn rate depends not only on your product subscription but also on the experience and the value that customers perceive from your subscription.
If you have a high churn rate, you have to evaluate what's going on in your company and which areas of improvement you have to reduce your churn rate.
Monthly recurring revenue measures the total amount of predictable revenue that a company expects to receive every month. This is also crucial to understand month-to-month differences in your subscription business.
You can also use this metric to measure your subscription growth and for a financial forecast.
You need to evaluate your MRR to see whether you have the expected revenue growth or if there's something in a specific month that didn't allow you to grow as expected.
Suppose you aren't correctly calculating your MRR, in that case, you might be losing customers and revenue every month. Thus, take the time to calculate this metric accurately, so you can have an overall picture of how well your subscription business is performing each month.
Annual recurring revenue is the annualized equivalent of MRR (is your MRR multiplied by 12). This is the annual metric to know how your subscription business performed in a year.
You can use our PaaS/rental/lease business calculator to calculate some of the key metrics for your subscription business. These are some of the metrics you can calculate in our calculator:
Download our business calculator for free.
CLTV represents the revenue you expect from a customer on your subscription product during a given period.
Lifetime value (LTV) of a customer can be calculated by taking the customer revenue minus the lifetime customer costs. For example, if a customer pays €700 worth of products from your subscription business over its lifetime, and the total costs of service and selling those products is €200, then the LTV is €500.
If you have a high LTV - Means you have satisfied customers
If you have a low LTV - Your company might be getting less money out of each customer, and you should check why this is happening to improve it fast.
CAC is the predicted cost of acquiring new customers; this indicates how much you are spending on acquiring new customers. CAC is the total cost of your sales and marketing efforts that are needed to acquire new subscribers.
CAC (customer acquisition cost) can help you to assess subscriber's ROI (return on investment) and to determine your marketing and sales efforts' effectiveness to keep your marketing and sales budget optimized for what works best.
The retention rate is the percentage of customers that are retained in a given period. The retention rate is a metric that can help you sustain happy customers over their lifetime, and it needs to be continuously analyzed in detail.
When acquiring customers is essential to measure how much of those customers are staying with you.
Ideally, you want 100% of your subscribers to stay with you, but this is almost impossible, as you'll always have some percentage of people dropping for different reasons.
The rate at which people sign up for a free trial of your product and become a paying subscriber.
When offering a free product, keep in mind the value you'll be receiving from these promotions and the percentage of trial users that converts.
To grow your subscription business, you need to make sure you have a low customer churn rate and that you are tracking the MRR, ARR, CLTV, CAC, retention rate, and your trial conversion rate to know how your business is performing.
In Firmhouse, we have experts in PaaS/rental/lease subscriptions. Our team is ready to help you to get started and scale your subscription business. Contact us to schedule a demo or sign up for free today to start using our platform.
