Financial Planning & Analysis

Subscription Business Model Metrics: A Systems Check

Clothing retailer Bloomingdale’s recently launched a fashion-rental-subscription service, just one example of the growing trend towards “subscription” businesses. When executed successfully, the appeal of subscription revenue is apparent – recurring revenue, increased customer lifetime value (LTV), and reduced customer churn. However, because subscription business model metrics aren’t always planned from the outset, this business model can create blind spots for management.

There are many things to consider when launching a subscription business, from branding and marketing to pricing and customer experience. But for this article, we will focus on the less glamorous topic – systems. Specifically, management will require visibility on four key items to manage any growing subscription business, so ensure your internal systems can capture and publish these critical data points.

Customer Acquisition

Where do your customers come from and how much did it cost to acquire them?

Attribution – where your customers came from – is a simple enough question, but it can become terribly complex as a business grows. In the early stages, there might only be a handful of referring partners or channels, but over time, the question of attribution becomes exponentially complex. Do you have a system in place that captures customer information (at the individual customer level)? Is there a consistent logic behind the naming conventions and fields captured?

Cost of Acquisition

What did any given customer “cost” you to acquire? Like attribution, cost of acquisition can be fairly simple at the outset when marketing dollars are focused on only a select number of channels. But like acquisition, it is important to have the right system in place to capture acquisition costs and, again, to establish from the outset the logic and structure of the data. Having the ability to segment acquisition expenses, at the campaign level, and track this intelligently throughout the acquisition funnel, is paramount to having high-quality cost of acquisition data.

Customer Lifetime Value

Whether your company is interested in revenue, margin or both, establishing how much customers (by segment) are worth to your business is a critical piece of information that will drive marketing spend, product development, and customer retention efforts.

Like so many of the variables in a subscription company, the customer lifetime value metric begins to get convoluted very quickly as the customer base becomes increasingly fragmented. As the number of acquisition sources increase, and the number of campaigns increase, a need will develop for integrated, well organized systems to create a “real” LTV metric. A moment will arise where you’ll want to compare the lifetime value of a customer acquired via Partner A during campaign 6 against a customer acquired via Partner Z during campaign 22, for example. Being aware of long-term complexities at the onset can help you avoid surprises down the road.

Reconciling and Reporting

You’ve set up the systems to capture the subscription model business metrics you need and are paying close attention to make sure that your data is set up to “play nice” together. Now you need to have the ability to actually bring all these data points together and get the information into the hands of the people who need it!

The tool can be anything from PowerBI to Tableau, to a module of a larger tool like NetSuite or Oracle Cloud – the bottom line is that you will need to establish a central repository that stores and streamlines the data from all of your various systems.

Establishing a ‘one source of truth’ is critical to ensure that everyone in the organization has access to the same, accurate, trusted information. Resolving naming convention discrepancy and ‘cleaning’ data appropriately is done here, to make the end-user experience (e.g., accessing reports) as frictionless as possible.

Finally, the outputs. In my experience, the outputs (e.g., reports, self-service data) are the easiest part of the data process, so long as you’ve done a proper job in structuring the underlying data. Far too many companies want to simply swap out their visualization tool hoping for enhanced reporting, when the problem is actually the underlying data.

Keep Improving: More on Subscription Model Business Metrics

No company I’ve encountered does all of these things perfectly. But the best ones define the ideal state of their internal systems and consistently strive towards that goal. For many companies, a useful first step is to start with the end in mind – the ideal data they want at their fingertips. From there, create a map that details how and where this data will be captured, how that data should be structured, how data from a variety of systems or modules will be centralized and ultimately, how the information is going to accessible to the end-users who need it.

To learn more about how we can help your company select, implement or optimize your systems, visit our financial systems page.

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