6 Top Most Important KPIs for Subscription Merchants

Subscription business models are not just a passing trend but a proven method of securing recurring revenue for businesses. They offer many benefits, such as customer loyalty and predictable cash flow. 

Customers are not just satisfied with their ongoing services; they are delighted. This level of satisfaction is a testament to the loyalty and trust that businesses can build through subscription models, ensuring a steady stream of revenue and fostering strong customer relationships.

If the subscription eCommerce sale trends are reviewed, you will notice how the industry has grown from US$16.49 billion in 2019 to $38.2 billion in 2023. 

Given the increasing focus on changing trends, it's becoming imperative for businesses to focus on critical subscription metrics and truly understand them. This understanding can help them increase revenues, maintain good customer service, and build a brand name.

How to Reduce Subscription Churn?

Since subscription businesses are directly affected by the different churn types, only a tiny amount is within everyone's control. 

According to the Subscription Economy Index, the subscription churn rate benchmark 2022 was 6.4%. While the media and professional services recorded the highest industry retention rates (84%), the lowest was for financial/credit and cable at 25%.

Since every subscription-based business must tackle involuntary and voluntary churns, it's essential to understand how to address and reduce them. An increase in these churn types is detrimental to your business's growth.

1. Addressing Voluntary Churn

Voluntary churn refers to your customers leaving your business. There can be various reasons behind this churn type. For example, they might not like your services or are unhappy with your pricing and fee structure. Either way, an increase in voluntary churn means losing your customer base. 

To reduce your voluntary churn, you can consider some of the following factors: 

1. Ask for feedback from leaving customers.
2. Follow a targeted approach for different customer groups.
3. Conduct regular checks with existing customers for changes.
4. Make the checkout process more straightforward. 
5. Predict high-risk customer population.

2. Addressing Involuntary Churn

Involuntary churns are the opposite of the former churn variety. They will silently creep up on your business without prior notice, and you must act deftly to avoid losses. 

To address involuntary churns, here's what you can do: 

1. Address payment declines - soft and hard.
2. Retry payments and offer alternate payment methods to customers.
3. Utilize automated retry algorithms to prevent manual intervention.
4. Change your payment retry cycles.
5. Proactively address issues related to expired cards and payment modes. 

What Are the Top KPIs for Subscription Merchants?

As a subscription business owner, you must track a few essential KPIs to stay ahead of churns and revenue losses. Here are the six top KPIs to look out for: 

1. Churn Rate:

   The churn rate is the rate at which customers terminate subscriptions, making it one of the most valued business metrics. 

The lower the churn rate, the more profitable the business. Churn rates between 5% and 7% are manageable, while anything above 7% needs immediate attention.

Churn rate: Total number of customers lost / total volume of customers at the beginning of the review period*100

Once you zero in on a percentage, you can decide and decipher the real reason behind your customer losses.

• Monthly Recurring Revenue (MRR):

  MRR is not just a metric; it's a cornerstone for your business. It's an ideal tool for predicting your recurring revenues from subscriptions, providing a solid foundation for gauging your company's growth and business stability. 

Calculating MRR is a straightforward process. Simply tally up all the monthly subscription fees you've received, and you'll have your MRR.

With MRR in tow, your business can determine the inherent cash flows and plan your budgets effectively. Revenue information helps make well-informed financial decisions while forecasting expenses and cash flows.

• Annual Recurring Revenue (ARR):

  The Annual Recurring Revenue (ARR) is similar to MRR but calculated for extended periods.

ARR plays a pivotal role at the end of the year, guiding businesses to review their past performances and strategically set goals for the new financial year. Your understanding of ARR is key to this process.

You can calculate ARR by multiplying the average annual revenue per user by the number of users.

• Customer Lifetime Value (LTV):

  The Customer Lifetime Value (LTV) measures the total value every customer adds to the business during their entire association. This KPI is a valuable metric for understanding customer profitability, maximizing revenue, and optimizing operations.

LTV helps gain insights into customer segmentation, allocate resources effectively, and plan customer acquisition. With the proper selection, businesses can draft retention strategies and focus on the most important customer segments.

LTV= Average Revenue per User (ARPU)/Average Customer Lifespan

• Customer Acquisition Cost (CAC):

  Customer Acquisition Cost (CAC) gauges the resources and expenses to acquire a new customer. This enables businesses to evaluate the efficacy of marketing and sales efforts. 

CAC = Total Sales and Marketing Expenses/Number of New Customers Acquired

CAC allows businesses to gauge the investment required to acquire new customers and assess the sustainability of the existing business model. CAC helps determine the revenue streams and their profitability and, in turn, identifies opportunities for cost optimization and efficiency.

• CAC to LTV Ratio:

  LTV and CAC are dynamic metrics that reveal your customers’ spending prowess and whether the revenues are worth retaining the customers. You can quantify and aptly optimize your marketing funnels with the correct ratio calculations.

The ideal ratio is 3:1; adjustments would be advisable when the CAC is high and LTV is low. This combination means you are spending too much money acquiring a customer who is not paying enough in return for your products/services.

Conclusion

Churn-based KPIs can help you decide your business’s growth trajectory. Each of these metrics is useful in assisting subscription-based companies in understanding their customers' needs, performing customer segmentation, and targeting high-profile customer sales. 

Each metric measures a different aspect, allowing businesses to understand and address the issues of customer-centric losses.