Why metrics and reporting matter
Every company needs to track its performance to make smart, informed decisions to gauge success, grow, and adapt. Companies that operate with recurring revenues need to adopt metrics that reflect the economics of the subscription business model. Subscription businesses have unique data points and KPIs that traditional reporting and analyses cannot serve. To be successful, subscription businesses need to track metrics tailored to their recurring revenue business needs.
Here are the top metrics that every subscription-based business should keep a close eye on:
Annual recurring revenue (ARR)
ARR is a key metric for any subscription company. It gauges the performance of the business on a year-over-year basis. This metric is critical for cash flow forecasting and real-time insight into financial health.
ARR = [annual price of service x number of active customers]
Monthly recurring revenue (MRR)
MRR is similar to ARR. This metric is a gauge of the revenue a business can depend on from month to month. It is helpful in measuring the immediate effects of product or pricing changes, and also helps track seasonal fluctuations.
MRR = [monthly price of service x number of active customers]
Average revenue per user (ARPU)
Subscriber revenue is rarely a simple calculation. Beyond the regular fee, revenue can rise or fall due to discounts, freemiums, upgrades, downgrades, or one-time purchases, to name a few factors. The ARPU metric provides a single, rationalized figure that takes all these variations into account.
ARPU = [total revenue in subscription sales / total number of customers]
Customer lifetime value (CLV)
CLV is the most fundamental of all recurring revenue metrics. It tells you how much revenue a subscriber generates in total. The upside of the subscription business model is the simple truth that the longer you retain a customer, the more value they create.
(average monthly revenue per customer x expected average lifetime) - acquisition costs and overhead]
Customer acquisition cost (CAC)
Growth is the lifeblood of subscription companies, but it comes with a cost and must be balanced against expected revenue. Your CLV and ARPU data combined with the CAC metric will help you answer the question of how much you should be spending on customer acquisition.
[total acquisition marketing and sales spend for a given period / new paying customers converted during that period]
While churn is inevitable in a subscription business, the concept of “acceptable levels of churn” is intolerable. Churn is insidious, driving companies to invest more in acquisition to sustain growth targets, and ultimately damaging to brand value.
[(total cancellations for a given period / total number of customers during the same time) x 100]
Growth efficiency/magic number
One of the trickiest questions that a CEO and CFO face is how to allocate resources. Growth efficiency is known as the “magic number” because it captures how much growth in revenue can be generated by a dollar spent on marketing or reinvested in the business. Investors like to use the growth efficiency metric to evaluate a company’s performance.
[(recurring revenue in present quarter - recurring revenue in preceding quarter) / total marketing and sales spend for quarter 1. Round to the nearest tenth.]
Lead velocity rate (LVR)
LVR is a real-time metric that measures whether companies are doing a good job of growing their pipeline.
[(number of qualified leads in current month - number of qualified leads in preceding month) / qualified leads in current month x 100]
Subscriber Return on Investment (sROI)
Unlike ROI, which is a macro metric, sROI allows you to drill down to expected returns at the subscriber level. Essentially, sROI is the ratio of lifetime value to acquisition costs, which gives an indication of the relationship between profitability and financial health.
[CLV / CAC]
Check out our ROI Calculator to delve into your metrics.
The bottom line
Vindicia makes it easy to track the metrics that are critical to your subscription businesses. We deliver subscription intelligence to help you see the truths in your subscription data. Subscription intelligence isn’t a product – it’s baked into everything we do. Turn to our dashboard and data warehouse to discover the what’s and why’s of your business. You get a real-time view of data and help from our team, giving you an edge as you make decisions. Subscription intelligence helps you:
- Discover: Track your subscription metrics within our dashboard-based portal
- Learn: Work with experts who find insights into your data
- Apply: Turn insights into improved business outcomes
Read our subscription intelligence datasheet.
Read our eBook "CFO guide | Top 9 subscription KPIs to measure revenue and growth" to learn more about the top metrics that will help your organization achieve subscription business success.
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