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Subscriptions are all around us. Nowadays, you can create your entire lifestyle around subscriptions. Nearly every product category is available as a monthly service. Traditional products are converted into subscriptions, while completely new ones are being created. If you want to enter the subscription market, you’ve made the right decision. Using this business model creates consistent revenue and helps you receive feedback faster from your customers.
The subscription economy offers as many advantages for businesses as it does for consumers. But mindsets need to shift when evaluating subscription success compared to one-time purchases. To ensure you are on the right track and don't have any setbacks, here are a few metrics we suggest you keep an eye on. Top tip: make sure you regularly track and analyze them.
Let's start with a clear new metric to track. How much revenue can you predict monthly? If you offer a product portfolio of simple subscription plans, you only need to calculate the number of subscribers by the monthly plan price.
Number of subscribers x monthly plan price
However, this can become more complex depending on other billing components, e.g. if you offer subscription periods longer than a month, if you have a usage-based subscription or if you offer multiple discounts. Remember: do not include one-time fees in this calculation.
Forecasting. It will tell you how much revenue you can expect for the whole year.
However, making a month-on-month comparison is even more useful. It helps you directly measure your initiatives and their success. If the monthly revenue has significantly changed, you have most likely changed something in your offering. Did you gain or lose more customers than expected? MRR is one of the best metrics to evaluate your performance.
If you’re already tracking your monthly revenue for a short-term evaluation, it’s a great idea to track your accumulated yearly revenue metrics. You can do this easily. Just multiply your MRR by 12.
MRR X 12 months
Please note that if you have a 12-month subscription period, you will need to subtract any set-up and one-time fees.
At the beginning of your subscription service, you will most likely operate at a loss. It takes time to build up a sustainable business model, especially if your customers have the flexibility to cancel at any time and if your product solves their needs. That’s why investors want to see your predictions for the upcoming years to evaluate the health of your business.
Subscription models make receiving customer feedback easy. You can find out about their product satisfaction and help solve their problems, retaining them for longer. However, if they cancel their subscriptions after a shorter period, you most likely promised them something they did not receive. Once you have calculated the average customer lifetime, you need to multiply it by your monthly subscription price.
Average Lifetime of the Customer x Monthly Subscription Price
As a business, you'll want to understand how much money you can make with your customers in the future. If you calculate the LTV, you can see if it costs you more money obtaining a customer than you make in profit. After calculations, you can see if you need to improve your churn rate.
This number indicates how many of your customers stay subscribed to your service after they have the option to cancel a subscription. Of course, it would be great to keep them all. While this seems unlikely, you should always strive to achieve the highest number possible.
Did you know that another word for Retention Rate is Subscription Renewal Rate? For more insight, look at our other article that summarizes the advantages of tracking this KPI.
We know this won’t apply to all of you. Not every subscription model offers its potential customers a free trial period. However, you should consider this approach. If you have a great product that continuously benefits your customers, you can easily offer them a solution to help them try it out. Not only is this a great way to showcase your product to many people, but it also builds trust. Potential customers always consider how respectable a company appears, so how do you calculate the Trial Conversion Rate?
Number of customers who swapped from trial to paid model / Number of trial customers
When a customer converts from a trial to a paid model, this often means you have succeeded in proving you are delivering value. However, if you see many churns, it most likely means something has not turned out as expected for the customer. You might have presented your product well, but ultimately, you were overpromising. Another reason could be that the customer won't pay the price for the result you delivered, even though it might have been helpful. If you see a big gap in the Trial Conversion Rate, follow up with your customers to better understand their decision.
Try to set up automated dashboards so you can quickly see the performance. If you manually source the numbers every time you want to look at them, your workload will significantly rise. Automated dashboards alert you if one number is performing lower or above average, forcing you to take quick action. Also ensure you look at the numbers from different perspectives. Check the current state of the KPI and compare its performance to last month and the same month of the previous year.
KPI dashboards can also be very helpful for setting team goals and making sure everyone is working towards them. Start predicting the performance and check if you have hit your goal. Over time, you will improve your instinct and your understanding of which initiatives are driving value to your goals.
Make sure the numbers are accessible for the team and find a slot where you can discuss the results regularly to analyze what impacts the numbers.
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