As a business owner, you’re always looking for ways to increase your subscription revenue. But which metrics are used to measure subscription revenue? Read on to find out!
Which Metrics Are Used to Measure Subscription Revenue?
Pay close attention to a few specific, measurable, attainable, relevant, and time-bound metrics.
So which metrics are used to measure subscription revenue? Continue reading to find out!
When deciding which metrics to track, ask yourself what questions you’re trying to answer. Then, consider what data points you already have access to. Finally, decide how you’ll track and analyze your data.
Here are the most important subscription business metrics to track:
1. MRR & ARR
Monthly recurring revenue (MRR) is a metric that measures the amount of revenue your company generates each month from recurring sources. This figure provides valuable insights into the health and growth of your business and can be used to track progress over time.
MRR is a key metric for any subscription business as it provides insight into expected monthly revenue.
Annual recurring revenue (ARR) is a key metric for subscription businesses to use to anticipate future revenue and visualize their size. ARR is calculated by multiplying monthly recurring revenue (MRR) by twelve.
MRR & ARR formulas
To figure out your Monthly Recurring Revenue, multiply the total number of clients by the average amount of money they each pay.
MRR = the number of customers X average income per client.
For ARR, take your MRR and multiply it by 12.
(Total Number of clients X average monthly revenue) X 12.
The importance of tracking MRR & ARR
Measuring a company’s monthly recurring revenue (MRR) and annual recurring revenue (ARR) is important to gauge the health of your subscription business. MRR and ARR are used interchangeably because they provide insights into your predictable revenue. By tracking MRR and ARR, you can identify whether your business is growing or if there are areas that need improvement.
Overall, measuring your MRR and ARR is crucial to get a snapshot of your predictable revenue and guide sales efforts and budget wisely.
How to Improve MRR & ARR
There are three surefire ways to boost your recurring revenue.
1. Charge more
Undercharging your subscription is a common mistake. Many companies set their prices early and fail to adjust them over time.
While pricing monthly subscriptions can be tricky, one approach is to price it based on the perceived value. This could be based on the number of people using the product, the number of features and capabilities, or a combination of both.
2. Stop using plans that give unlimited usage.
Offering “unlimited” subscriptions could backfire. Why? Because you’re offering an unlimited amount of value to your customer, but limiting their payment to a certain amount.
If you’re offering an unlimited plan, make sure you’re charging a reasonable price. Otherwise, you could end up exhausting your resources like client support.
3. Increase your revenue by expanding your offerings to your existing customer base
It’s much cheaper to retain your current customers than it is to find new customers. After all, these clients are already familiar with and like your service or product.
2. The ARPU: Measure Subscription Revenue
Your average revenue from users (ARUP) is another important KPI for measuring your businesses profitability. This helps you understand how profitable each customer is, which can help you target your marketing efforts more effectively.
By tracking ARPU, you can better assess which areas of your business are generating the most revenue and where there may be room for improvement.
ARPU formula
To calculate your ARPU, divide your monthly recurring revenue by the Number of active customers you have in a particular month.
ARPU = MRR/Number of active clients.
Including active users in your ARR calculation helps you see if your free offering is profitable.
To calculate ARPU using only your paying customers, divide MRR by the Number of active paying customers. This value is also called average revenue per paying customer (ARPPU).
This metric is the average amount of money you make from each customer.
Why ARPU is important.
Understanding your ARPU helps answer whether your pricing model is sustainable.
To get a more granular understanding of your clients, you can compare ARPU across different plans. This will give you insights into which plan is more popular and whether there is positive or negative growth in each part of your business.
If your average revenue per user is going up, this means you have more customers who spend a lot on your service. If your ARPUs are going down, it means you have more customers on cheap, basic packages.
This isn’t bad, though, because you can still earn revenue from these customers.
Three ways to improve your ARPU.
1. Tiered Pricing plans
Tiered pricing is an excellent way to attract clients with different needs and budgets. By offering more expensive plans with greater value, subscription businesses can encourage customers to upgrade their subscriptions. This benefits the customer by providing them with more features and helps businesses retain subscribers.
If you want your loyal customers to stay with you, offer incentives to upgrade to higher-priced plans. By providing more value and features for higher prices, you can entice them to stay with your company.
2. Optimize the freemium or free options
A free or freemium plan is a great way for potential customers to try your product. It can help get your business off the ground, but be careful because these resources can quickly become overwhelmed.
If you offer a free app or product, your goal is to get as many people as possible to upgrade to a paying subscription. One way you can do this is by highlighting the value that premium features provide.
3. Offer add-on features
Add-on features are extra tools you can add to your RingCentral account, giving you more ways to earn revenue from each customer.
3. Customer acquisition cost (CAC): Measure Subscription Revenue
Customer acquisition cost (CAC) is a key metric that all businesses should monitor. CAC provides valuable insights into the costs associated with acquiring new customers. Unlike MRR, ARR, and ARPU, CAC can also be applied to non-subscription businesses.
The CAC metric only considers how much it costs to acquire a new customer. It doesn’t take into account any ongoing revenue from that new client.
CAC formula
To calculate your customer acquisition costs (CAC), add up your expenses related to acquiring new customers, then divide that figure by the number of new clients acquired during the same period.
CAC = The amount of money you spend on acquiring customers /the Number of new paying customers you acquire.
Your customer acquisition costs should cover any cost incurred at every single step of your sales and marketing process.
Why CAC is important
CAC is used to evaluate the effectiveness of various marketing campaigns. With it, you can determine which campaigns are worth investing more in.
CAC can be used to figure out if your business is making a profit.
If your CAC (customer acquisition cost) exceeds your LTV (customer lifetime value ), you have difficulty growing your business and making it profitable.
The optimal ratio between Lifetime ValuLifetimetomer Acquisition Cost is 3:1.
4. Customer churn: Measure Subscription Revenue
While losing a customer is painful, you should track how many people are leaving you.
This value represents the rate at which customers cancel your service every month.
Customer churn formula
To measure Customer churn over a given period of time, simply divide the number of users who left over that time period by the total number of users who signed up during that period. Multiply that number by 100 to get the percentage of users that have left.
Customer churn = (Number of customers who have left/Number of customers at the start of a period) x 100.
Importance of measuring customer churn
Losing a client is costly, and there are two main reasons. First, it costs more to acquire a new client than to retain an existing one. Second, losing a client means less revenue.
Churn helps reveal issues in your organization.
An increase in customer turnover can indicate bigger problems. For example, if customers are leaving because of a product issue, this could mean that your product isn’t meeting their needs.
If you see an uptick in churn, it may be time to take a step back and reassess your product-customer fit. Make sure your marketing is reaching the right people and that your sales team is qualified enough to bring in the right clients.
A churn rate can help you better estimate your revenue and plan for the future.
If you have a consistent customer churn rate, you can accurately understand your earnings. This allows you to ask questions like, “Is our revenue growth consistent month after month? Why or why not?” This information can help you decide how to improve your business.
Churn is an inevitable part of doing business, but a lower customer churn rate means more revenue and better customer retention. By understanding your churn, you can get an accurate picture of your earnings and make informed decisions about growing your business.
How to reduce customer churn
Reducing customer turnover is a lot like trying to plug a leaky pipe. No matter what you do, some customers will always leave.
Luckily, there are a few ways you can prevent customer attrition.
Frequently checking on your customers.
Your relationship with customers doesn’t end with the sale.
Checking in with your clients regularly helps you stay ahead of any potential problems they may be having. With the many SaaS tools available that automate client success emails, it’s easy to provide a personal touch that will keep them coming back for more.
Find customers who are at risk of leaving and convince them to stay.
As part of your customer success strategy, monitor the activities of clients at risk of leaving. Look for patterns in their activity that indicate they may be about to churn.
When using a CRM, it is important to monitor customer behavior. If you see a client at risk of churning, reach out and offer them an incentive to return to your product. This could be something like a discount or a free trial.
Ask customers who leave why they left and use the information to improve your service.
By understanding why customers leave you, you can pinpoint the areas that need the most attention.
Timing is everything when asking for customer feedback. Be sure to ask customers for their input 24 hours after their cancellations.
You’re still fresh in their mind by following up with them, so they’ll be more inclined to respond to you.
Like you can automatically send out customer feedback surveys, you can similarly set up an automated system for sending out cancellations.
5. Customer lifetime Value
The expected revenue that each customer will generate for your company before they churn is customer lifetime, or CLV metric can help you compare customers to each other.
How to calculate the CLV
The CLV is calculated by dividing the average revenue per customer by the customer churn rate
CLV = ARPU / Churn rate
Churn is a major problem for businesses because it directly impacts lifetime value. The higher the churn, the lower the lifetime value. That’s why it’s so important to keep track of both metrics!
Importance of measuring CLV
Companies that operate subscription-based models often use Customer Lifetime ValuLifetimeto measure how much they spend on acquiring new customers.
CLV & CAC
When you clearly understand your CLV, start to think about how much you can afford to spend on acquiring new customers. By looking at CLV as a ratio to customer acquisition, you can better understand what makes financial sense for your business.
For subscription services, a 3:1 CLV to CAC ratio is ideal.
If your CLV to CAC ratio is above three, then you are spending more to acquire new customers than their lifetime value; you are spending too much.
CLV helps you to identify ideal customers
Knowing your customer’s lifetime value is incredibly important. It can help you figure out which customers are worth spending the most on.
Variances in churn and what to watch out for when calculating the CLV.
It bears mentioning that the CLV estimate can be off by 50% in statistical modeling.
This is because the churn metric is sensitive to changes in population; even though the number of customers has no bearing on an individual customer’s lifetime value and accurate calculation of CLV, it’s important to account for any population changes when determining churn.
Churn can greatly impact CLV, so it’s important to keep an eye on it. However, churn is a volatile metric, so CLV isn’t always 100% accurate. Instead, consider CLV a financial health barometer: Is it increasing or decreasing?
How to improve CLV
Now that we know why CLV is important, let’s discuss ways to improve it.
Analyze the CLV by each of your different segments
Again, while CLTV may not be perfect, it can still help you determine your most valuable clients.
One way to determine your Customer Lifetime ValuLifetimebreaking it down by segment. This usually means the plans your customers are on for a subscription business.
Customers who are on lower-priced plans are more likely to leave your company. However, those on more expensive packages tend to stay with you longer.
Medium to large-sized customers are better to target when pursuing new sales.
Interview clients who have the highest CLV
Once you’ve identified your most valuable customers, you can talk to them to find out why they stayed with you. This insight can be incredibly valuable in growing your business.
Increase ARPU
ARPU is a key metric in calculating CLV and it stands to reason that a higher ARPU would result in a higher CLV.
Conclusion: Measure Subscription Revenue
Now you know which metrics are used to measure subscription revenue. SaaS businesses can use ARPU, Customer Churn, CAC, CLV, MRR, and ARR to measure their revenue performance.
