Subscription business models have been growing at an unprecedented rate over the last decade, with new businesses seemingly popping up every day. From a modeling standpoint, subscription-based key performance indicators (KPIs) are unique compared to those used by traditional transactional businesses. Because subscription models place an emphasis on the customer, KPIs for subscription businesses involve metrics related to acquisition, revenue and retention.
Tracking KPIs specific to your business model is important for understanding business needs and supporting the decision-making process necessary for business growth. The right KPIs can help you evaluate the current performance of the company, identify and manage key drivers, forecast future demand and understand future profitability. By comparing your KPIs against industry- or company-specific benchmarks, you can also highlight areas of improvement.
As finance professionals, we often get bogged down with different metrics regarding company performance. However, developing an awareness of the most important metrics and focusing on them can help us understand which levers drive profitability and sustainability. With that in mind, let's take a look at some essential subscription business KPIs.
Key Takeaways
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Table of Contents
- Customer Acquisition Cost (CAC)
- Churn
- Average Revenue per User (ARPU)
- Customer Lifetime Value (LTV)
- How Subscription Business KPIs Support Modeling
KPIs for subscription businesses involve metrics related to acquisition, revenue and retention. Tracking these metrics is crucial for understanding business needs and supporting the decision-making process necessary for growth. The right KPIs can help you evaluate current performance, identify key drivers, forecast future demand and understand profitability. By comparing your KPIs against industry- or company-specific benchmarks, you can also highlight areas of improvement.
As finance professionals, we often get bogged down with different metrics regarding company performance. However, developing an awareness of the most important metrics and focusing on them can help us understand which levers drive profitability and sustainability. Let's explore four essential KPIs that every subscription business should track.
1. Customer Acquisition Cost (CAC)
CAC is an important subscription business KPI, as customer acquisition is a large expense that can become detrimental to smaller businesses. According to research by ProfitWell, CAC has increased by over 70% in recent years for SaaS companies. By tracking the total cost of sales and marketing efforts to acquire a customer, companies can:
- Better understand where marketing dollars should be spent
- Identify cheaper or more effective channels for acquiring customers
- Set realistic expectations for ROI on marketing and sales spend
CAC Formula
[Total Sales & Marketing Costs] ÷ [Number of New Customers Acquired] = CAC
To calculate CAC, simply divide the costs of acquiring new customers by the customers acquired during that same time. For example:
In July, Company X spent $20,000 on ads / 2,000 customers were gained from those ads = $10 CAC
Overall, CAC is essential for assessing a subscriber's return on investment and how much money you'll be generating per customer acquisition. It also helps keep your marketing or ad spend budget in check.
Your CAC should include all costs that result in acquiring a customer, such as advertising, digital marketing and any other associated expenses. As your company grows, it is natural to spend more money on advertising as you want to increase your customer base—which will inherently increase your CAC over time.
2. Churn
Churn, or attrition, calculates the rate that you lose customers each month. According to Recurly Research's comprehensive study, this rate depends on several factors and will typically fluctuate month over month, with B2B and B2C businesses experiencing significantly different benchmark rates. Churn is one of the critical subscription business KPIs because a churn rate higher than your growth will lead to fewer customers.
Churn Formula
[Number of Lost Customers] ÷ [Total Customers at Start of Period] × 100 = Churn
To calculate your churn rate, simply divide the customers you lost during a given period by the number of customers you had to begin the period. For example:
Company X had 2,000 customers at the beginning of the period / 50 customers were lost during that month = 2.5% churn rate
To grow the business, we would now need to acquire more than 10 customers during the next period. Understanding churn essentially predicts the sustainability of your business: as the churn rate increases, your ability to grow and scale your business becomes even more challenging. Customer acquisition costs will undoubtedly increase as you have to replace the customers you lost with new ones.
3. Average Revenue per User (ARPU)
ARPU tracks the average revenue amount you're getting from an individual customer, which helps you understand the value your customers provide to your company. OpenView's SaaS Benchmarks report shows that ARPU is one of the most critical metrics for predicting long-term success. ARPU is particularly valuable when your company offers different tiers of services or membership, as it helps identify which pricing strategies are most effective.
ARPU Formula
[Total Monthly Revenue] ÷ [Total Number of Users] = ARPU
To calculate ARPU, simply divide your monthly revenue by the total number of customers during that period. For example:
Company X had $150,000 in revenue / 1,500 subscribers = $100 ARPU
By including ARPU as one of your subscription business KPIs, you can help inform about sales efforts, opportunities to upsell or down sell packages, retention strategies and a host of other valuable takeaways. ARPU allows the business to track the monetary value of their users, especially when your subscription business offers multiple product tiers. When used correctly, ARPU helps inform the business about trends within a customer group against cohorts from different periods. It can help identify the different price points customers prefer and typically can be used to upsell higher priced products when you need higher revenue.
You can even break ARPU down by new subscribers versus recurring subscribers, which will help illustrate if new customers are paying more for your services.
4. Customer Lifetime Value (LTV)
LTV is often seen as one of the core metrics for subscription-based businesses, since getting customers to stick around for as long as possible is essential to business sustainability. A Harvard Business Review analysis found that increasing customer retention rates by just 5% can increase profits by 25% to 95%. The higher your LTV, the more value you're perceived to have from your customers' standpoint. LTV measures the revenue an average customer earns for the business from the day they sign up to when they stop using your services (i.e., when they churn).
LTV Formula
[Average Revenue per User] ÷ [Monthly Churn Rate]
To calculate LTV, you take the entire historical earnings of a customer, then divide it by your churn rate. For example:
$100 ARPU / 2.5% churn rate = $4,000 LTV
In order for your subscription business to be successful, your LTV should be higher than your CAC -- meaning over a customer's lifetime, they bring in more revenue than what you spent to acquire them. This helps you distinguish the limit of how much you should spend on marketing efforts and can identify who your most valuable customers are.
5. How Subscription Business KPIs Support Modeling
Focusing only on the metrics tied to revenue (i.e., the KPIs of a traditional B2B business) doesn't give you the entire picture of your company's sustainability. Tracking the aforementioned subscription business KPIs offer many benefits, especially when they're precise and specific to your business.
From an organizational perspective, presenting these metrics monthly during board meetings can help each department understand which levers actually drive business performance. That understanding can help business leaders make more informed decisions, better understand their subscribers and focus on the segments and activities that are most valuable to the business in the long run.
Get Expert Financial Advice, Track KPIs, & More for Your Subscription Business
Understanding and tracking the right KPIs is crucial for subscription business success. From customer acquisition costs to lifetime value, these metrics provide vital insights into your business's health and growth potential. By focusing on these four essential KPIs, you can make data-driven decisions that support sustainable growth and profitability.
8020 Consulting's team of experienced finance professionals can help you implement and optimize your KPI tracking and financial modeling strategies.
Contact us today to learn how we can help your subscription business thrive →
Additional Resources
To help you dive deeper into subscription business metrics and financial modeling, we've curated these valuable resources:
Industry Benchmarks & Research
- OpenView's 2024 SaaS Benchmarks Report - Comprehensive data on SaaS metrics across different company sizes and growth stages
- Recurly's Subscription Industry Trends - In-depth analysis of subscription business performance across various industries
Financial Modeling Resources
- Guide to Subscription Revenue Modeling - Our detailed guide on building effective subscription revenue models
- Customer Acquisition Metrics Guide - Deep dive into customer acquisition metrics and their impact on business models