How To Measure Subscription Business
Did you know that in the subscription economy traditional profit and loss indicators like sales revenue, gross margin, operating profit percentage and operating profit in euros are no longer the ultimate measure of success?
In the subscription business model, the focus is no longer on the past and the figures from the previous financial period – instead, it's on the future. Here are some financial metrics to get you started!
MRR (Monthly Recurring Revenue)
In the subscription economy, revenue streams come from ongoing recurring payments rather than one-time transactions. It makes more sense to measure the recurring monthly revenue in the near future instead of solely focusing on historical revenue. This revenue stream can also be measured on an annual basis, known as ARR (Annual Recurring Revenue). The advantage of this approach over the traditional product-based economy is that you don't just know your revenue from last year but also have visibility into your revenue for the upcoming year(s).
CAC (Customer Acquisition Cost)
In the subscription economy, the customer is at the center of everything. Your task is to convince the customer of the value they will receive through your offering. Selling value and cultivating a long-term partnership differs from traditional sales of individual units which is why it's crucial to understand the customer acquisition cost. This metric is essential for assessing the profitability of your business.
This metric indicates the number of active subscribers or customers. The goal is to strive for growth by acquiring new customers.
This metric reveals how many of your previously active customers have discontinued their subscriptions. It's important to keep this number as low as possible and ensure it doesn't exceed the number of new customers joining your subscription service.
Customer Lifetime Value (CLV)
CLV represents the total revenue a customer generates for your company over their entire lifetime, not just within a specific fiscal year. This metric should always be higher than the CAC value to ensure the profitability of your subscription business.
To sum it up
By getting to know these key metrics, you can begin to understand the differences in measuring success in the subscription economy compared to traditional models. Additionally, there are several other metrics to consider. By combining and analyzing these metrics, you can gain further insights to support your subscription business.Talk to our expert