Optimizing your subscription service through data-driven strategies enables ecommerce merchants to better serve customers. Monitoring performance metrics can help ecommerce business owners make informed decisions on the best methods for growing revenue.
August 22, 2022
Subscription ecommerce brands offer customers the convenience of recurring billing. Through subscription purchase models, merchants have a unique opportunity to scale revenue based on data trends that revolve around customer relationships rather than one-time sales. Evaluating subscription analytics is becoming easier with emerging technologies and merchants are better equipped to assess subscriber behavior. Ecommerce merchants can capitalize on building better processes, products and subscription offerings.
Unlike one-time purchase models, recurring revenue can assist merchants in testing new growth strategies based on how customers are regularly interacting with subscription offers. One of the perks of subscription model setups is growth in customer retention, allowing merchants to effectively address scalability factors such churn rates, acquisition costs and customer lifetime values. A subscription-based merchant will need to review specific information on a monthly, quarterly and yearly basis. What is the key data that can help subscription businesses scale more quickly?
For any business, analytics guide informed decisions and help business owners understand behavioral, marketing and financial patterns that work to set the foundation for success. Routinely measuring data can have a huge impact on any type of business model. Carefully reviewing business analytics can help in various ways, including:
What makes subscription-based business models unique, however, is that the business is set up to bill customers on set recurring intervals. Subscription merchants, ideally, will have a network of users.
User metrics and interactions depict a bigger picture of overall business health. Tracking these trends on an ongoing basis can help ensure that a business is consistently looking toward avenues that help improve or avoid costly missteps.
Subscription models are a fast-growing area in ecommerce and other industries, such as fast food. Knowing which metrics to track success is only one piece of building revenue growth for ecommerce shops. Subscription analytics help merchants understand what can be done to positively influence better outcomes for customer purchases and internal management for merchants.
Subscription management tools are making it easier for merchants to:
In a traditional single-purchase ecommerce business, KPIs usually revolve around conversion rates (CR) and increasing traffic to sites to improve CR. Subscription models, on the other hand, focus on building out long-term subscriber relationships, which means shifting the focus of traditional KPIs. Specific subscription analytics provide these key insights on a regular basis.
Most ecommerce businesses track annual and monthly recurring revenue (ARR and MRR). Connecting these specific figures with inventory management can aid ecommerce shops in making more informed decisions for the types of products selected for subscription offers. Additionally, ARR and MRR help merchants determine where their online stores stand financially.
One of the most notable benefits of subscription ecommerce is consistent, recurring revenue. Subscriptions provide predictable income. As a result, ARR and MRR metrics empower merchants to forecast future cash flows and budgets. In understanding where cash flows stand, business owners can more accurately predict how to invest in specific product inventory without overflow or increased costs of sourcing new products. Subscription offers, for the most part, remain consistent and predictable.
Essential subscription metrics to help manage inventory include:
MRR gives businesses a real-time snapshot of the revenue they can plan on generating during any given month. It can be calculated simply by taking the number of active subscribers and multiplying it by the monthly subscription fee.
MRR = Total subscribers x base subscription cost
The monthly recurring revenue is also the main building block for other critical insights, such as specific purchases routinely made. The MRR equation can even be slightly modified to provide insights into purchased subscription offers or upgrades.
MRR can help merchants assess the best-performing offerings. If there’s a specific product or service that continually generates more recurring revenue, managing these items more effectively or efficiently can help increase MRR. Evaluating what services or product purchases a customer is likely to make, can help merchants improve the deliverability and marketing of such offers further driving MRR.
Similar to MRR, annual recurring revenue gives a business owner a quick overview of revenues and yearly growth. ARR is essential in making long-term decisions and macro planning.
ARR = (Monthly rate of subscription x 12) x total subscribers
One strength of ARR compared to MRR is that small sales dips, special offers and other changes or promotions have less of an impact on the overall figure. This metric is not only important for internal decisions and processes, but also a key indicator for investors.
ARR, much like MRR, can help set a foundation for a company’s current progress and predict future growth. Beyond that, it can help measure momentum for merchant’s shops that track new sales, renewals and upgrades. Auditing ARR can assist ecommerce business owners in evaluating product-market fit, planning for new offerings or scaling on expansion revenue.
Stratified service tiers (monthly, quarterly, annually) can complicate recurring revenue metrics. If the majority of your subscription base is onboarded to one rung of your program, this could mean irregular billing cycles. The average order value (AOV) can account for these types of cycles and provides a picture of what the company can expect to make off of any given customer.
AOV = Gross revenue / orders
Unlike one-time purchases, subscription services are meant to drive ongoing, long-term relationships to help generate consistent revenue. Merchants should be looking monthly and quarterly at methods and strategies on how to increase AOV to help avoid churn.
Average order value, additionally, allows merchants to consider how to provide value to customers using well-known ecommerce strategies such as upsells, cross-sells and product improvements.
Subscription offers have changed how customers are making purchases. Customers now have the freedom to throttle purchases, whether they elect to increase or decrease consumption of a particular product or service. With this, subscription merchants can find tools that allow loyal consumers the option of self-managing their recurring purchases.
Improving the overall customer subscription experience is vital to the continued growth of ecommerce business. Offering buyers convenience and flexibility outside of one-time purchases allows merchants to focus on how to improve interactions with buyers who are unlikely to cancel a subscription. Through subscription analytics, merchants can remove the guesswork on what customers need, want, like or dislike, doubling down on efforts to expand on offers that consistently scale revenue.
Metrics that drive the subscription experience can include the following and should be monitored closely on a monthly or quarterly basis.
Whatever the source, churn is one of the key indicators of user experience and functionality in a subscription model and should be monitored monthly. When churn rates begin to swell, business owners need to take action. This may mean identifying and lubricating sources of friction in the sales funnel or even reviewing customer insights to assure products and services are delivered at quality standards.
Churn rate = Lost Unique Customers ÷ Starting Unique
Ecommerce business owners should also consider deficiencies in their billing infrastructure if they are looking to reduce churn rates even further. Subscription management software like sticky.io equips ecommerce businesses with tools to implement smart dunning, automatically update billing information and reprocess declined payments.
Another source of sunk costs and profit leakage is refunds and returns. Ecommerce businesses should watch refund and return rates to help indicate if product quality or customer experience is suffering and needs attention. While refund rates may be observed monthly, quarterly reviews would likely offer more comprehensive insights and trends.
Return rate = (Refunds ÷ Total Orders) x 100
Multiplying by 100 will provide the percentage for your return or refund rate.
Subscription ecommerce businesses should consider reviewing customer lifetime value at least on a quarterly basis. What this metric tells us is fairly straightforward: the projected revenue that a customer will generate during their lifetime.
(Recurring Average Order - Cost of Subscription) ÷ Churn
Ecommerce businesses should note that an increase in CLTV can also yield increases in total profits. Additionally, key findings report that it costs as much as five times more to attract new customers than to retain existing ones.
A merchant may choose to set up a subscription service with a free trial or introductory offer to help improve overall customer acquisition. Understanding key performance metrics like costs for acquiring new customers can help merchants decide whether these offers are worth the investment.
The following KPIs can help drive growth and reduce overhead costs for subscription ecommerce businesses.
Similar to an abandonment rate, micro and macro conversion rates can tell a business owner how effective their sales funnel is performing. This metric can be reviewed every month to assure continued growth and minimize leakage.
Conversion Rate = (Total conversions / Total sessions) x 100
In order to provide the rate, which is a percentage, be sure to multiply by 100.
Subscription models depend on a healthy ratio of customer acquisition and churn. However, if the costs of onboarding new customers are out of control, it will eat into profit margins. The amount of money spent to acquire a new customer is known as customer acquisition cost (CAC), sometimes referred to as cost per acquisition.
CAC = Acquisition Cost ÷ Orders
This metric can identify if marketing strategies are being implemented effectively. Business owners should consider reviewing CAC on an annual basis. If a certain advocacy channel is performing well in CAC, business owners can take the metric and leverage it to focus marketing expenses on where they’re most effective.
Subscription analytics and reporting are critical to every ecommerce subscription business’ success. However, selling subscriptions isn’t a science and taking advantage of your data means adopting metrics that are focused specifically on your products or services. Evaluating, testing, learning and adjusting are part of the process of growing a subscription-based business.
Merchants are becoming savvy with tracking data that is pertinent to ongoing ecommerce customer needs. Personalizing reporting dashboards is essential to defining individualized strategy and defining solutions for your subscription offers. It’s important to first define what your goals are and then determine which data source is critical to track on an ongoing basis.
Notice that most metrics are customer oriented. A top objective for most subscription services is improving how customers interact with your specific offering. Subscription commerce platforms should consider their customers as they move forward with tracking performance. Emerging and integrative technology can help businesses accomplish this feat.