9 most important metrics for Subscription Businesses

For companies with subscription models, tracking certain metrics is very important. These metrics do more than just tell you how much money you're making or how many customers you have. They help you figure out where your business is going and how well you're keeping your customers interested and happy.

When discussing key performance indicators (KPIs), it's important to recognize that metrics and the expected figures can vary significantly between sectors. Moreover, there's a fundamental difference in these metrics between Business-to-Business (B2B) and Business-to-Consumer (B2C) models. For example, the churn rate for a B2C mobile app can be substantially higher than for B2B services. This is due to the nature of consumer behavior, which is often more fickle and driven by trends, compared to the typically longer-term and contractual relationships found in B2B environments.

By looking at these numbers closely, you can make better plans for how to run your business and make sure it keeps growing.

Let’s explore them.

1. Monthly Recurring Revenue (MRR)

What is it?

MRR is the total predictable revenue generated from all active subscriptions in a month.

Why is it important in subscription businesses?

MRR is crucial because it reflects the stability of income and helps identify growth trends or concerns promptly, which is essential for the recurring revenue nature of subscription businesses.

What is a good rate for MRR?

A "good" MRR growth rate can vary widely by industry and company size, but typically, a rate that outpaces churn and aligns with strategic growth objectives is considered healthy.

Calculation:

Multiply the total number of subscriber by the average amount each subscriber pays per month.

MRR = Total number of subscribers x Average revenue per subscriber per month.

2. Annual Recurring Revenue (ARR)

What is it?

ARR is the yearly revenue that a business can expect from its subscribers.

Why is it important in subscription businesses?

ARR provides a broader perspective on financial health, smoothing out short-term fluctuations and offering a clear view for annual planning and investment strategies in subscription models.

What is a good rate for ARR?

A healthy ARR is one that shows steady or increasing trends, indicating that the business is gaining long-term subscribers.

Calculation:

Take your MRR and multiply it by 12 to get the annual figure.

ARR = MRR x 12.

3. Churn Rate

What is it?

Churn rate measures the percentage of subscribers who cancel their subscription within a given period.

Why is it important in subscription businesses?

In subscription models, customer retention is as critical as acquisition. Churn rate highlights the effectiveness of retention strategies and impacts revenue directly.

What is a good churn rate?

An acceptable churn rate varies by industry, but typically rates below 5-7% annually (around 0.42-0.58% monthly) are considered good for SaaS businesses. - Medium no follow

Calculation:

Divide the number of customers you lost in the month by the number you started with, then multiply by 100 to get a percentage.

Churn Rate (%) = (Number of customers lost during the month / Number of customers at the start of the month) x 100

4. Renewal Rate

What is it?

Renewal rate is the percentage of customers who continue their subscription after their initial contract ends.

Why is it important in subscription businesses?

It indicates customer loyalty and satisfaction, which are pivotal for the long-term success of a subscription-based business model.

What is a good renewal rate?

A strong renewal rate would typically be above 75%, indicating that the majority of customers see continued value in the service.

Calculation:

Divide the number of customers who renewed their subscriptions by the number who were up for renewal, then multiply by 100 to get a percentage.

Renewal Rate (%) = (Number of customers who renewed / Number of customers up for renewal) x 100

5. Average Revenue Per Account (ARPA)

What is it?

ARPA indicates the average amount of revenue generated per account, usually calculated monthly.

Why is it important in subscription businesses?

It helps businesses understand revenue generation at the account level, tailor pricing strategies, and identify upsell opportunities within their customer base.

What is a good ARPA?

A good ARPA varies widely; what's more important is the trend. Increasing ARPA indicates successful up-selling or customers moving to higher-value services.

Calculation:

Take your total revenue for the month and divide it by the number of accounts you have.

ARPA = Total revenue for the month / Total number of accounts.

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6. Customer Acquisition Cost (CAC)

What is it?

CAC is the total cost associated with acquiring a new customer, including marketing and sales expenses.

Why is it important in subscription businesses?

CAC is particularly important in subscription businesses because it must be recuperated over time through the subscription payments. It affects how much can be spent on acquiring customers and still maintain profitability.

What is a good CAC?

A good CAC varies widely but should generally be recovered within a year of a customer's lifetime value for the business to be sustainable.

Calculation:

Add up all the costs spent on acquiring customers (marketing and sales expenses) and divide it by the number of new customers acquired.

Total cost spent on acquiring customers / Number of new customers acquired.

7. Customer Lifetime Value (CLV)

What is it?

CLV is the total amount of money a customer is expected to spend in your business during their lifetime as a customer.

Why is it important in subscription businesses?

CLV is critical for subscription businesses as it helps determine the long-term value a customer brings, which informs how much can be invested in acquiring and retaining customers.

What is a good CLV?

A good CLV should be at least three times greater than CAC for a business to be considered healthy. - LinkedIn Business

Calculation:

Multiply the average purchase value by the average number of purchases in a year, and then multiply that by the average customer lifespan in years.

Average purchase value x Average number of purchases per year x Average customer lifespan (years).

8. Lead Velocity rate (LVR)

What is it?

LVR measures the growth in qualified leads from month to month.

Why is it important in subscription businesses?

LVR is important because it provides an early indicator of revenue growth potential and sales momentum in a subscription business, before those leads convert into paying customers.

What is a good LVR?

A positive LVR that aligns with or exceeds growth targets is generally good, showing that marketing efforts are generating potential new business.

Calculation:

Calculate the new leads in the current month, subtract the new leads from the previous month, divide by the new leads from the previous month, and then multiply by 100 to get a percentage.

LVR (%) = ((Number of qualified leads this month - Number of qualified leads last month) / Number of qualified leads last month) x 100.

9. Trial conversion rate

What is it?

This metric represents the percentage of users who convert from a free trial to a paid subscription.

Why is it important in subscription businesses?

The trial conversion rate is pivotal for gauging the effectiveness of the trial experience and understanding how well it convinces potential customers of the product's value.

What is a good trial conversion rate?

An effective trial conversion rate can range from 20-40%, depending on the product and industry standards. - DataDab

Calculation:

Divide the number of customers who started paying after a trial by the total number of customers who entered the trial, then multiply by 100 to get a percentage.

Trial Conversion Rate (%) = (Number of users who convert to paid subscribers / Total number of users who started a trial) x 100.

Bonus: Measure all these metrics for free - with Hyperline

Hyperline offers an intuitive platform to track these essential metrics without any cost.

By integrating seamlessly with your existing systems, Hyperline provides real-time insights into your subscription business' performance, allowing you to make data-driven decisions in the simplest way.