Businesses using subscription models are expanding dramatically as more customers use subscription services. Because of this expansion, it becomes necessary to track a variety of crucial subscription model metrics and KPIs (key performance indicators). Metrics such as subscriber acquisition expenses, customer lifetime value, customer churn, contribution margin, and many others.
Free trials, discounts, exclusive content, and data-backed tailored experiences are becoming increasingly demanded by customers. This puts many subscription businesses under pressure to understand what is most successful in order to expand opportunities in sustainable, measurable ways.
That’s why in this GrowTraffic article, we want to help you understand the subscription model metrics.
What is a Business Metric?
Various business processes are tracked, monitored, and evaluated for success or failure using business metrics. These metrics are quantitative measures used by companies. Business metrics are primarily used to convey the progress of an organisation on their goals, whether they’re short- or long- term.
When businesses create objectives, strategic and financial, using metrics can help them organise and achieve them. They aid managers and company owners in improving choices and evaluating the efficiency of how their business operates.
Insights become quantified through metrics and these insights may then be used by managers to create new or enhance pre-existing corporate strategies.
What is a Subscription Business Model?
Selling goods or a service in exchange for recurring monthly or yearly income is the foundation of subscription business models. Over customer acquisition, they put more emphasis on customer retention.
Essentially, subscription business models concentrate on how money is generated so that a single consumer makes several payments for continued access rather than paying a one-time hefty sum upfront.
In fact, these models are becoming more in-demand in our modern economy. While subscription services for streaming, like Netflix and Amazon Prime, have been around for over 10 years now, newer subscription methods for more unique creations are being launched.
Now don’t you think a monthly subscription for a tea box sounds just lovely? Maybe something stronger… Gin? Well, that’s possible these days. (I’ve definitely been tempted once or twice!)
What Are Some Metrics for Subscription Business Models?
Metrics like revenue growth and production costs may be used in typical business models that have one-time sales. However, subscription business models often need a separate set of metrics to evaluate and analyse companies’ performance.
Let’s explore some of them to get a better understanding of the metrics that subscription business models use.
Customer Lifetime Value (CLV)
CLV shows the total income a single customer is likely to make over the course of their lifetime using the service. Because of this it is often argued to be one of the most crucial metrics for subscription businesses.
This income needs to be greater than the costs of providing the service and gaining the client and those are sometimes only paid after multiple payments have been made.
Customer Lifetime Value is often one of the first considered metrics when making important decisions. For instance, if the CLV is shown to be declining or static, it can indicate more serious problems with customers.
Indicators like low renewal rates, higher churn rates, and other factors that could lead to the need for purchasing marketing. Therefore, by using the CLV metric, leaders can define progress toward profitability, or they can assess the performance in relation to realistic expectations over a longer period.
Basically, the larger this number is, the more value your product has to your subscribers. And if they value something then they’re happy to continue subscribing to receive the service.
Churn is a given for practically any business and subscription-based enterprises are not exempt. The number of current clients you are losing, plus the amount of money you have lost over any time frame is information that is provided by the churn metric.
So customer churn shows you how many initial customers have cancelled their subscriptions. And because it’s more expensive to recruit new customers than to keep existing ones, churn is a very important metric to monitor.
Every subscription business has a certain degree of churn that is acceptable – usually it’s 4% and lower. Though they’re difficult to predict, understanding and resolving the reasons for churn are pretty quintessential (not to mention cost-effective) to enhancing the health of your company.
The data you collect can even be analysed and potentially utilised to make well-judged decisions on customer retention actions in the future.
A gross or per-unit basis might be used to express the contribution margin. It indicates the additional revenue made for each product or unit sold after costs for variable elements have been subtracted.
Contribution margin offers a means of demonstrating the potential for profit of a certain product being supplied whilst displaying revenue percentages that go toward paying the business’ fixed costs. Whatever amount is left after fixed expenses have been paid is the profit.
The contribution margin can assist business management teams in decision-making when it comes to deciding between potential goods that all compete.
For example, if the contribution margin was higher for product A than it was for product B then the management team would choose to manufacture product A more. This is because product A has a higher potential for generating a larger profit.
Cashflow metrics are financial indicators which demonstrate the efficiency with which a business is running. These metrics can be used to help managers and owners form judgements as well as make an evaluation on the quality of economic policy.
Investors may also compare firms using the financial data.
Statements on cashflow will reveal everything regarding a company’s finances – details on liquidity, asset changes, liabilities, and shareholder equity. The cashflow statement illustrates how much cash your company is bringing in and spending over a certain time period.
Scenario analyses are processes through which a business will examine, assess, and forecast outcomes for potential future scenarios. They may demonstrate to stakeholders and investors the potential outcomes of certain financial transactions, actions, or circumstances.
Additionally, a scenario analysis aids businesses in creating preparations before a disaster arrives. By preparing ahead, a business can be better prepared to respond when calamity hits or when development prospects present themselves.
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