Measuring subscription KPIs is vital to running a subscription rental business. Sure, you already have a lot on your plate with managing inventory, marketing, and providing excellent customer service. However, key performance indicators (KPIs) are the best way to track the success of your subscription business, find out what's working, and what can be improved.
While SaaS businesses popularized many of these KPIs, they've been adopted by the broader business community because they provide a quantifiable way to demonstrate long-term health. When your subscription business starts tracking KPIs, it gives you the guidance and direction you need to improve business performance.
Here is a list of 14 essential KPIs that help measure and drive business growth.
1. Monthly Recurring Revenue (MRR)
Monthly recurring revenue (MRR) is a simple yet critical KPI. While many new businesses focus on deals and bookings, what ultimately matters is how much revenue you drive. Keeping on top of your secured monthly revenue flow is critical for planning, budgeting, and forecasting.
How do you measure MRR?
You can measure monthly recurring revenue (MRR) with this simple formula:
MRR = average monthly revenue per user * number of users
Why should you measure MRR?
Monthly recurring revenue is one of the most important metrics because it gives you a baseline to determine cash flow and budget. You can plan and budget more effectively if you have a strong sense of what money is coming in each month.
2. MRR Growth
A monthly recurring revenue growth rate measures the increase or decrease in your monthly revenues. It's one of the most important metrics because it helps contextualize MRR. While emerging businesses might not have substantial monthly recurring revenue numbers, they know they are on the right track if they can demonstrate steady, incremental growth.
How do you measure MRR Growth?
MRR Growth is easy to calculate if you have MRR figures for the last few months. For example, as shown below, you subtract your current month's MRR from the previous month's MRR.
MRR Growth = New MRR - Previous MRR
The formula for the MRR (Monthly Recurring Revenue) growth rate is calculated as follows:
MRR Growth Rate = (New MRR - Previous MRR) / Previous MRR * 100
Where "New MRR" is the current month's MRR and "Previous MRR" is the MRR from the previous month. The result is expressed as a percentage, reflecting the growth rate of MRR from one month to the next.
Why should you measure MRR Growth?
MRR growth is a great way to measure business momentum. If your MRR Growth rate is positive, your business model is working. Negative MRR Growth is cause for concern and should prompt you to explore churn rate, customer acquisition, and other subscription metrics to explain the slump.
3. Annual recurring revenue (ARR)
Annual recurring revenue (ARR) is another vital SaaS business metric adopted by a wider scope of subscription businesses. Similar to MRR, it instead looks at your recurring revenue over the course of a year.
How do you measure ARR?
You can find your ARR with this formula:
ARR = average annual revenue per user * number of users
Why should you measure ARR?
Annual recurring revenue is another crucial metric to track. While monthly recurring revenue gives you a great snapshot of your short-term activities, it's affected by seasonality and other trends. ARR offers a more long-term view of how your business is performing.
4. ARR Growth
Annual recurring revenue growth gives a more long-term overview of your company's performance.
How do you measure ARR Growth?
Finding ARR growth is simple with this formula:
ARR Growth = ARR (New) - ARR (Previous)
Similar to the MRR growth rate, the ARR growth rate is calculated with the following formula:
ARR Growth Rate = (New ARR - Previous ARR) / Previous ARR * 100
Why should you measure ARR Growth?
ARR growth rates are less influenced by seasonality and chance. Used in combination with MRR, it can tell you much about your business's direction.
5. Customer Lifetime Value (CLV)
Customer lifetime value (CLV) measures what each customer is worth to your business over their entire customer relationship.
How do you measure CLV?
To measure customer lifetime value accurately, you need a few different pieces of information.
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Average purchase value (APV): You can find this by taking (total value of purchases/number of purchases)
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Average purchase frequency (APF): Find this by calculating (# of purchases/# of customers)
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Customer value: APF x APV
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Average customer lifespan: The average length of each customer relationship
Once you have all that information, use this formula.
Customer lifetime value (CLV) = customer value * average customer lifespan
Why should you measure CLV?
There are several reasons why CLV is necessary to measure. Perhaps most importantly, it will tell you what segments your most valuable customers come from. This information can power your customer acquisition and retention strategies.
Targeting your ideal customers is an efficient way to run your operations. Instead of sinking money into acquiring customers who end up costing you money, you can focus on targeting audiences with the best potential to become loyal customers and generate revenues over time.
6. Customer Acquisition Cost (CAC)
Customer acquisition cost (CAC) is a crucial metric for any subscription business. It measures the total costs of your sales and marketing efforts to win new business.
How do you measure CAC?
CAC is fairly easy to measure. You can use this formula to work it out:
Customer acquisition cost (CAC) = (Total cost of sales and marketing)/(number of new customers acquired)
Why should you measure CAC?
Customer acquisition costs are a vital way to measure what it takes to win new customers.
When compared with key metrics like CLTV, how much it costs to acquire customers offers strong insights into your business model. It's important to determine what it costs your sales and marketing teams to acquire new customers to see if you will be profitable over the long term.
7. The average revenue per unit (ARPU)
The average revenue per unit (ARPU) helps you understand what contribution each part of your inventory is making toward your overall income. When you have an ARPU, you can look at each item and determine if it's worth keeping or just taking up space.
How do you measure ARPU?
You can calculate ARPU with the following formula:
Average revenue per unit = (total revenue)/(total units rented)
Why should you measure ARPU?
ARPU is important to measure because it can support you in defining your pricing strategy and improving your inventory management. Additionally, it can help you identify opportunities to increase sales and revenues.
8. Average Revenue Per Customer (ARPC)
The average revenue per customer (ARPC) is an excellent way to contextualize sales revenue and understand your subscription pricing strategy. A low ARPC could indicate that you are not charging enough for each product or service. On the other hand, it can also indicate problems with customer retention.
How do you measure ARPC?
You can measure ARPC over a particular time with this formula:
ARPC = (total revenue)/(# of customers)
Why should you measure ARPC?
ARPC is one of the best revenue metrics because it tells you how much each paying customer is worth to your business. You can use this to justify the marketing spend required to generate new sales or customers.
9. Retention rate
While the retention rate is similar to the churn rate, they are different data points necessary for any business that uses a recurring revenue model. Retention rate measures the frequency you hold on to customers, while churn rate determines how often you lose business.
How do you measure retention rate?
You can measure retention rate over several different timelines. Let's look at how to measure it over a year.
Retention rate = (# customers at the end of 2022 - # new customer acquired during 2022)/(total customer at start of 2022) * 100
Why should you measure retention rate?
Customer retention is one of the most important KPIs for subscription marketing departments. To grow and scale, you must retain existing customers while adding new business. Mashing new customers into your business through advertising is not sustainable if you hemorrhage users through bad service. It's impossible to keep every customer, but low retention rates are a big cause for concern and indicate that something is going wrong.
10. Revenue retention
Revenue retention measures how much revenue you drive from your existing customers over a specific period. It considers revenue churn rate, upgrades, downgrades, cross and upselling, etc.
While adding new revenue in the form of new customers will increase revenue, net revenue retention can tell you a lot about customer experience.
How do you measure revenue retention?
To calculate net revenue retention, you need a few other figures. They are:
Starting MRR: Revenue from the last month
Added MRR: New revenue from subscription services, upsells, etc.
Lost MRR: Lost revenue from downgrades
MRR Churn: Revenue lost from customer cancellations
Then you can apply these figures to the following formula:
Revenue retention = ((starting MRR + added MRR) - (lost MRR + churned MRR)/starting MRR)) * 100
Why should you measure revenue retention?
Measuring revenue retention gives you a fuller picture of how your business operates without reliance on your marketing and sales team's performance to acquire new customers.
11. Customer retention
Customer retention is a vital metric, especially during times of high customer acquisition costs. Holding on to your current customers is how subscription businesses grow and scale.
How do you measure customer retention?
You can measure retention rates over periods like a month or a year by using this simple formula:
Customer retention rate = (customers at the end of the period - new customers)/customers at the start of the period
Why should you measure customer retention?
No matter whether you are a SaaS company or a subscription business selling physical goods, retaining customers is an essential measure of the health of your business. Knowing your retention rates gives you a good idea about your customer experience.
12. Revenue churn rate
Revenue churn tells you how much revenue you have lost through cancellations and downgrades over a specific period. Though related to customer churn, it puts a monetary value on the loss of business rather than customer numbers.
How do you measure revenue churn?
You can calculate the churn rate over a specific period by using this formula:
Revenue churn rate = (lost revenue/revenue at the start of the period) * 100
Why should you measure revenue churn?
Aggressive marketing can lead to revenue growth and blindside you to customer success issues. Understanding your revenue churn lets you focus on how your service levels affect revenue.
13. User churn
User churn — or customer churn — measures the number of customers you lose over a particular period. If you acquire customers through sales and marketing, it can cover over issues with retention. Calculating user churn means you have a better idea of what customers actually think about your service.
How do you measure user churn?
You can find your user churn over a particular period by using this formula:
User churn = (lost customers/customers at the start of period) * 100
Why should you measure user churn?
A high churn rate can tell you much about your company's economic viability. If you can't keep enough customers happy and engaged, attrition will gradually erase your customer base, no matter how fast you can acquire new customers.
14. Payback Period
Payback period KPIs help you measure how long it will take for a particular investment to bear fruit. These investments could be in acquiring customers or purchasing the inventory you rent or sell to consumers.
How do you measure the subscriber payback period?
Working out a subscriber payback period is relatively straightforward. You simply divide your customer acquisition cost by the monthly subscription cost.
Payback period = CAC / by average subscription cost.
So, for example, if it costs you $100 to win a customer, and the monthly subscription cost is $20, it will take them (100/20) or five months to pay back the sales and marketing costs involved with securing their custom. From this, we can conclude that to run a profitable business, the customer lifespan must be well over five months, as your business also has operational costs that need to be covered by sales.
How do you measure the inventory payback period?
The inventory payback period is easy to measure. However, if you want reliable figures, you need to be able to forecast how much revenue a particular item will bring in per month or year.
It's an important KPI because you can use it to justify spending on particular items.
Inventory payback period = (cost of the item) / (monthly revenue from item)
For example, if an item costs $1000 and brings in $100 in monthly revenue, it takes ($1000/$100) 10 months to pay back the investment. Remember that product maintenance between orders also entails costs that need to be considered when calculating the product payback period.
Why should you measure payback periods?
Thinking about payback periods for investment is a critical part of budgeting. Inventory costs deplete your capital. Therefore, you must know how long it will take to replace the investment costs. When planning your purchases, you should have an idea of how long the products in your range will last and how easy they are to maintain.
Tracking your metrics — a brief guide to dashboards
Dashboards are an excellent way to track key performance metrics. Taken individually, KPIs give you a granular view of different elements of your business. However, when combined in a dashboard, you have a rich picture of your operation's overall health and progress.
You can configure a dashboard to measure any metric. However, the ideal scenario means including a few Northstar metrics that you track systematically and drilling down into other metrics as and when you need a more detailed view.
Here is a quick step-by-step guide to setting up a KPI dashboard.
1. Define the main KPIs, the Northstar metrics, that are the most relevant for your business.
2. Define your data sources (e.g., your commerce platform, accounting software, etc.) and choose how you will store the data. For small businesses, a spreadsheet tool like Excel or Google sheets will provide adequate tools for storing and managing data. As your business grows, you will likely need to invest in a more robust data warehouse service. Snowflake, Google, Amazon, and Microsoft, to name a few, offer powerful data warehousing services.
3. If possible, automate data delivery between your data sources and data storage so your dashboards contain real-time information. Although there are many no-code tools for this task, setting up automated data flows requires some level of technical understanding. Check out, for example, Zapier, Make, and Supermetrics.
4. Think about who will use the dashboard. What information do they need to make optimal decisions?
5. Use business intelligence tools to help visualize your data and create dashboards. You can use free tools such as Google Data Studio or Microsoft Power BI to create charts, graphs, and other visual data representations. For more robust needs, you can explore products like Looker, Tableau, and many others.
6. Get the dashboard in front of stakeholders and implement a data-driven mindset into your company culture. Data and dashboards won't help unless they are actively used in your company's decision-making.
Conclusion
The subscription business model has become increasingly popular in recent years, with many businesses opting for this model to build a steady stream of recurring revenue. Key performance indicators help you understand your performance and make informed decisions to improve your bottom line.
Measuring KPIs is not just about numbers; it's about understanding the customer journey, identifying areas for improvement, and taking action to drive growth. By monitoring these metrics regularly, you can stay ahead of the curve and make the necessary adjustments to stay competitive in a rapidly evolving market.
Whether you're just starting or looking to grow your existing subscription business, understanding your KPIs and using them to drive better results is essential to winning in the long term.
