Subscription-based services can provide companies with an amount of data that is not available in traditional offerings. With each month, year or subscription period, there is new information that aggregates into a time-series analysis of company performance. While the potential for added insights is great, there are a few challenges that stand in the way of turning the data from unknown to actionable. Companies must determine their key metrics, the tools needed to measure them, their benchmarks for success, and finally, be able to act upon new insights quickly.
Naturally, measuring the performance of subscription offerings relies on recurring revenue and comparing one period with another. Regularly keeping track of the following metrics helps companies have a clear idea of the health of their recurring revenue, and the success of their acquisition and retention efforts:
Customer / Subscriber Churn:
Customer or subscriber churn expresses the subscription drop off over a specific time period, and can either be split into two categories: voluntary and involuntary churn. The churn rate is calculated as the number of subscriptions expiring in a period divided by the sum of number of subscriptions beginning of the period and new subscriptions gained in it:
Revenue Per Customer:
Average revenue per customer is very simple to understand and is a quick and easy way to track subscription changes and how they correlate with revenue. One cause for caution with revenue per customer is having a few subscribers generating the majority of revenue and skewing the expected marginal increase from each new subscription, so it is best used in combination with other metrics. Revenue per customer can be calculated as follows:
Customer Acquisition Cost (CAC):
Customer acquisition includes all costs incurred by an organization in order to convince a potential customer to signup as a subscriber.
Lifetime Value (LTV):
Lifetime value is an estimate of the profit generated from an average subscription from signup to churn:
LTV is especially important for companies making long-term decisions related to product development, marketing, and investment into specific geographies or markets.
The payback period of a new customer acquisition is a measure of how much time is needed for a company to recoup costs. As an individual metric, it can help outsiders understand the company’s pricing efficiency and profitability. Generally, a payback period of less than 12 months is considered healthy, but evaluating it along with the expected lifetime value for the average subscriber presents a clearer picture of the company’s future outlook.
Monthly Recurring Revenue (MRR):
Monthly recurring revenue is one of the most commonly used metrics for tracking subscription commerce performance. Properly measuring and understanding MRR is key to retaining revenue momentum and being able to analyze and react to revenue declines before they escalate to become a more significant problem.
More specialized metrics can be derived from raw MRR to track specific aspects of monthly performance:
Net MRR measured and tracked monthly can show aggregate changes and drilling down further into its individual components can help explain positive or negative trends.
Measuring with accuracy and confidence
Having an accurate and easy-to-use system to help keep track of all these metrics is essential to a sustainable success and allows you to focus on analyzing results and making the best business decisions. Binary Stream’s Subscription Billing Suite (SBS) is a comprehensive solution to billing, deferrals, and recognition that streamlines the entire quote-to-cash process at every step from billing and invoicing to reporting and forecasting. Backed by Microsoft’s Azure cloud and Power BI, SBS offers real-time analysis and forecasting on-the-go so you can always keep your finger on the pulse of your business.
SBS provides consistent and reliable invoicing for a wide range of pricing models, and allows you to take control of your pricing and billing schedules at the line item level within Microsoft Dynamics GP, Microsoft Dynamics 365 Business Central and Microsoft Dynamics 365 for Finance and Operations.