Ecommerce analytics are a blessing and a curse for retail sellers. On the one hand, you can find information on almost anything your customers do. On the other, you can find information on almost anything your customers do. It’s easy to get overwhelmed by the sheer amount of information available or get caught up in improving numbers that don’t impact the overall health of your subscription business.
Don’t waste your time tracking the wrong subscription business metrics. We’ve gathered a list of the seven essential key performance indicators (KPIs) you and your team should track and understand to help monitor your subscription business growth. Read on to learn how to calculate each, why they’re important and what you can do to boost lagging numbers.
Monthly recurring revenue = monthly subscription charge x number of customers
Your monthly recurring revenue (MRR) is the amount you earn from subscriptions each month. It’s also a measure of how much your company is growing. This number will likely differ from your monthly revenue because it does not include one-time fees and charges.
Subscription business owners should use MRR to accurately forecast their company’s future and create accurate budgets. Recurring revenue gives a reliable estimate of your monthly income, so you’ll know ahead of time what you can afford to pay in labor, overhead and other costs.
Calculating this number gets more complex if you offer more than one product or billing period. For instance, companies with tiered subscription offerings must multiply the subscription charge by the number of customers at each tier and then add those numbers. Companies that offer quarterly subscriptions need to find their quarterly recurring revenue (using the original formula above) and then divide that number by three to find the MRR.
If your MRR is trending upward, you’re bringing in more customers than you’re losing each month. If it’s not, you need to focus on reducing churn and/or accelerating your customer acquisition efforts.
Annual recurring revenue = subscription charge x number of customers x 12
Your company’s annual recurring revenue (ARR) is the amount you expect to earn from your subscription offerings over the course of the year. This number gives you a big picture look at your company’s performance. MRR can fluctuate as users upgrade or downgrade subscriptions, try or cancel add-ons or churn. Your ARR won’t be as susceptible to these variables — but it also assumes your customers won’t change their subscriptions or churn during the year.
Therefore, you can’t use this number alone to forecast your company’s future. An ARR you calculate at the beginning of the year and don’t revisit until December won’t reflect your company’s actual outlook, so it is wise to be wary of using this number to show trends or set revenue goals if you haven’t re-calculated it recently.
Every increase in ARR is an opportunity for you to invest more into your products, marketing or other business initiatives. It’s a clear signal that your company is growing. You can boost your ARR by consistently winning new customers while retaining and growing sales with the ones you have.
Average revenue per customer = MRR / number of customers
Your average revenue per customer (APRC) measures the average amount you earn from one customer in a month. This metric is also called average revenue per user (ARPU) or average revenue per account (ARPA). It tells you how well you’re monetizing your customers, and increases in ARPC show that your customers are satisfied enough with what you’re offering to spend more.
ARPC can help you suss out trends among different customer cohorts. If women between 18 and 24 have the highest ARPC of any demographic, you should spend more of your acquisition budget targeting them. It may also be worth investing in customer surveys or new offerings to appeal to segments with middling ARPCs. The money you put toward these segments may need to come out of the budget you previously used to serve a demographic with a disappointingly low APRC.
A higher ARPC means a higher MRR and ARR — but that doesn’t mean increasing your prices is always the right plan. Our April 2023 Subscription Commerce Readiness Report found that 55% of subscription cancellations are caused by a desire to cut costs. Instead of increasing your base price, boost your ARPC by adding different subscription tiers or product add-ons that make it easy to upsell your customers.
Customer lifetime value = average revenue per customer (ARPC) x average subscription length
A company’s customer lifetime value (CLTV) is the average amount each subscriber spends over the course of their relationship with the company. Your CLTV will reflect the impacts of churn, account upgrades and account downgrades. It lets you know how much you can spend on customer acquisition while maintaining profitability.
The tactics you use to increase your CLTV may vary depending on the type of subscription you sell. Some subscription sellers focus on retaining high-value customers to increase their CLTV. However, ecommerce subscription businesses are less likely to be held up by a few big buyers. They also tend to have higher churn rates than other subscription types, meaning an intense focus on retention may not bring the returns you’re after. Of course, you don’t want to ignore churn entirely — but increasing your APRC may be a better way to bump your CLTV.
Customer acquisition cost = sales + marketing costs (per period) / number of customers acquired in that period
Your customer acquisition cost (CAC) measures how much you must spend to win a new subscriber. It’s a key indicator of whether or not your business model is viable. Your CAC must be lower than your CLTV; otherwise, you’re losing money with each new customer you bring in.
The higher your CAC, the more retention matters — because you don’t want to spend a lot on a prospect who only sticks around for two months before canceling.
You can attempt to balance out a high CAC by increasing ARPC and CLTV, but it may be wiser to alter your marketing efforts to attract customers more effectively. Adjustments might include:
Even companies that aren’t worried about their CAC to CLTV ratio should consider the above questions to reduce acquisition costs and increase profits.
Churn rate = number of customers lost in a month / total number of customers
Your churn rate tells you how many customers you’re losing each month. Every subscription merchant needs to know this number to determine whether their business has long-term viability. The higher your churn rate, the more customers you must acquire each month to keep your MRR trending upward. You can calculate your churn rate monthly, quarterly or annually depending on your subscription billing frequency.
Ecommerce sellers with a low CLTV to CAC ratio must keep a close eye on churn rates. If you’re spending almost as much to acquire customers as you’re earning from them, you need to focus on keeping those customers around for long periods.
You’ll also want to compare your company’s churn rate to industry benchmarks. If you’re losing more customers than your competitors, is it because of your products, pricing strategy or customer service? Or do you have an abnormally high involuntary churn rate that can be decreased by some backend adjustments?
Knowing why your users churn will help you create a strategy to reduce your churn rate. Ask customers to fill out a short (one- or two-question) cancellation survey when they stop their subscription. You may learn your marketing is falsely inflating subscribers’ expectations or that a lower price tier would keep subscribers around for longer.
Revenue churn = amount of MRR lost in a month / total MRR
Revenue churn helps you understand your monthly losses in terms of budget rather than people. This number provides helpful context for subscription sellers with tiered product offerings or a lot of add-ons that can lead to a wide variance in customer spend. Losing a customer who’s buying your best offering could be worse than losing two or three at your lowest tier, which your churn rate won’t reflect.
Comparing revenue churn to churn rate by month can help you understand what kind of customers you’re losing. A month with a lower-than-usual churn rate but higher-than-usual revenue churn rate would indicate a loss of high-value subscribers or multiple subscription downgrades among big spenders. The opposite would indicate that lower-value customers are leaving. This information tells you where to focus your retention efforts.
The tactics used to prevent revenue churn are almost identical to those used to prevent overall churn. The only difference is that revenue churn is affected by subscription downgrades, not just cancellations. As we suggested for account cancellations, try surveying customers on why they’re downgrading to get an idea of how you can keep buyers at a higher price point.
Now that you know how to tell if your subscription business is on track for its best year yet, it’s time to start tracking these numbers. You could set up a spreadsheet and pull your numbers manually each month, or you could find a tool that tracks all the most important metrics for you. sticky.io comes with a built-in dashboard that covers the metrics in this post and more. Our automated reports make it easy to see subscriber growth, churn rates, CLTV and more.
With an advanced subscription ecommerce tool like ours, you can also track other important ecommerce and subscription metrics that give you context for the seven KPIs in this post. Just make sure you don’t start valuing these metrics over the ones we’ve listed above, or you’ll lose sight of the information you need to help your business thrive.