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Essential subscription business KPIs are key performance indicators that measure the effectiveness and sustainability of a company's subscriptions-based business model.
Measuring the success of your subscriptions model goes beyond just tracking new users and revenue. This is where specific subscription business KPIs, or key performance indicators, come in. Here, we will explore some of the most essential KPIs for subscription-based businesses to monitor.
KPIs (Key Performance Indicators) are quantifiable (hard data, facts) measures used to evaluate the results of an organization, employee, etc. regarding performance objectives. Basically, they quantify the business-relevant contribution of work done.
Subscription Business KPIs: Monthly Recurring Revenue
It goes without saying MRR is often considered the most important subscription business model KPI. Monthly Recurring Revenue (MRR) is the predictable revenue a company can expect every month. Therefore, MRR provides a clear picture of the revenue generated from subscriptions. This is used to gauge the overall health of a subscription business. It is particularly important for subscription SaaS companies. The general formula to calculate MRR is:
MRR = Total number of customers x Monthly billing amount
Subscription Business KPIs: Annual Recurring Revenue (ARR)
Annual Recurring Revenue (ARR) is virtual identical to MRR but measures the amount of revenue a company can expect to earn from its subscriptions over a year. The formula for ARR is:
ARR = Total number of yearly customers x Annual billing amount
Alternatively, if you have your MRR, you can multiply it by 12 to get your ARR. Like MRR, it is an estimation of a business’s health, not what is exactly on their balance sheet.
Subscription Business KPIs: Average Revenue Per User (ARPU)
ARPU is one of the most essential subscription business KPIs because it measures the revenue generated per user or unit. As such, ARPU is a useful metric for understanding your company’s revenue generation capability and growth prospects. The formula for ARPU is:
ARPU = Total Revenue / Total number of users
Essential Subscription Business KPIs: Customer Lifetime Value (CLTV)
Customer lifetime value (CLTV) predicts the total value a business will gain from the entire future relationship with a customer. Therefore, it’s a critical metric in determining how much money a company is willing to spend to acquire new customers and on cross-selling and upselling opportunities.
The formula for CLTV is:
CLTV = (Average purchase value x Purchase frequency) / Churn rate
Essential Subscription Business KPIs: Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) is the cost associated with convincing a potential customer to buy a product/service. It includes things like marketing budget (spend on campaigns, ads, events, etc.) and anything that contributes to the acquisition of a new customer. As such, it’s crucial for understanding the investment required to gain new customers. Additionally, it is a valuable metric for further analysis. Depending on the costs involved in acquiring a new customer, a subscription business can determine what initiatives contribute the most (or the least) to acquiring new customers. The formula for CAC is:
CAC = Total cost spent on acquiring customers / Number of customers acquired
Essential Subscription Business KPIs: Churn Rate
Churn rate is the percentage of subscribers who discontinue their subscription within a given time period. For that reason, it’s a critical KPI for any subscription business, as it directly impacts MRR and ARR.
The formula for churn rate is:
Churn Rate = (Number of customers at the beginning of the period – Number of customers at the end of the period) / Number of customers at the beginning of the period x 100%
Essential Subscription Business KPIs: Lead Velocity Rate (LVR)
LVR measures the growth in qualified leads from month to month. Indeed, it’s a powerful KPI for forecasting future sales, because a higher LVR indicates a higher potential for increased revenue in the coming months.
The formula for LVR is:
LVR = (Number of qualified leads in the current month – Number of qualified leads in the previous month) / Number of qualified leads in the previous month x 100%
Measure, Monitor, and Adjust
Monitoring these KPIs provides a comprehensive understanding of a subscription business’s health and growth prospects. Each one provides unique insights into different aspects of the business. Therefore, by monitoring them regularly, leaders can make informed decisions and strategic adjustments.
Looking for a tool that can help you monitor your essential subscription KPIS? If so, Nitrobox has exactly what you need. Explore our subscription reporting and analytics features to discover how we can help.