Finance Essentials for Subscription Businesses
hile finance metrics are important in all businesses, subscription businesses are further intertwined with the success of the company. As the business grows and more customers adopt subscriptions, there is more to work on for customer retention.
The arena itself is fast developing and there is more competition regarding promotions, offers, and free trials. Understanding the personal experiences and needs of customers will help organizations to understand what really drives success rather than adopting blanket policies that cast a wide net in the hope of catching a single proverbial fish.
The pressure to know can make it tempting to track every indicator possible in the search for useful information. However, that can lead to an overwhelming amount of data rather than strategic information that's in line with both customers’ needs and your business objectives. Data might be king, but discernment is very much the kingmaker.
Key performance indicators
At keylight, our emphasis is always on the customer experience and user centricity. These are not the first things that come to mind when people talk about finance, but finance is both deeply emotive for customers and a cornerstone of commercial success, making the intersection between the two essential. Businesses must choose the metrics they track with customer experience in mind.
Here we have identified the top five finance performance indicators, to begin with:
Monthly and annual recurring revenue
The same thing over different time periods, your monthly and annual recurring revenue (MRR or ARR) is the amount of money that comes in every month or year. Monthly recurring revenue is an indicator of short-term company progress, while annual recurring revenue gives an insight into longer-term success and can be used as an indicator of future growth. Knowing and comparing the two will give you an important insight into the trajectory of your organization.
Where most subscription businesses make an error is that they focus almost entirely on MRR, setting monthly rather than annual goals because it's easier to tie in with sales team efforts on the ground and to prioritize efforts. However, by keeping both in mind it's helpful for businesses to see whether short-term targets are actually equating to long-term success.
Having both sets of knowledge will help you:
- Set targets
- Plan expenditure
The average revenue per user
The average revenue per user (ARPU) takes a more detailed approach to revenue and where it's coming than MRR or ARR. It is the average amount of money generated from each individual subscriber over a particular time frame. ARPU is helpful for marketing as well as sales teams to understand in order to ascertain whether pricing is right, where the sweet spot is for customers, and where there are opportunities to upgrade customers. If the ARPU changes, it will also give an insight into the mindset of your customers. Do you need to respond accordingly to drive the cost of acquisition down and increase sales volumes?
Knowing this can help you:
- Set pricing strategies
- Understand what you need to do to be profitable
- Understand if you are currently on track to be profitable
Customer acquisition cost
How much does the customer acquisition cost (CAC) cost you to win each customer on average? This is another essential metric for understanding the profitability of your business, really appreciating how much you spend on product, sales, and marketing in order to attract new customers.
Where subscription businesses have an advantage is that while it's always good to drive the cost of customer acquisition down, to some extent it doesn't matter if it's high or low - it needs to be considered alongside other metrics such as customer lifetime value.
CAC will give an insight into the greatest areas of challenge within the sales journey and provide insights into where improvements might be made or a better understanding of your customer and their barriers to purchase might be.
Understanding the cost of customer acquisition will help you:
- Understand the effectiveness of your customer acquisition strategy
- Understand your customers better
- Adjust your sales strategy to 'speak' to customers more effectively
- Understand the profitability of your business and where you can improve it
- It also helps you and any investors understand the scalability of your business
Customer churn is one of the most important areas of attention if you want your subscription business to grow because it is a model that not only hinges on customer acquisition but customer retention. Winning customers isn't enough - you need to keep them. It's one of the reasons keylight enables considerate and advanced subscription cancellation flows.
While losing customers is inevitable, churn considers the rate of flow and the reasons behind it. By looking at the number of customers who cancel their subscriptions on a monthly basis you can establish the reasons, what constitutes an inevitable rate of churn and what’s an unusual level for your business. You can use the information to understand why customers are leaving and improve their experience in order to find ways to help them want to stay. Where a lot of companies lose focus is by creating a situation where customers almost can't be bothered to leave instead of proactively wanting to stay and remaining advocates of your business.
Understanding the rate and reasons behind customer churn will help you:
- Understand your customers and improve their experiences.
- Help to predict cancellations and create pathways to support customers in getting what they need.
- Understand the trajectory of your business and where improvements need to be made.
- It can be a signal as to bigger-picture issues within your organization. Set against customer acquisition it will also help you to understand if your business is actually growing or just on a cycle of winning and losing customers.
Customer lifetime value
Your customer lifetime value (CLV) is one of the most important pieces of data you can access as a subscription business, helping you to understand what works and what doesn't work for your customers.
When we look at MRR, it's easy to set sales targets against the highest possible production value. If that customer leaves after two months, but another who buys in at a lower rate stays for two years and ultimately spends more - the latter was most likely the more profitable sale.
Customer lifetime value looks at how much a customer is likely to spend over the duration of their relationship with your organization. It's the reason for low entry costs on basic subscriptions, understanding that it's a foot in the door to help customers feel comfortable and see if the service value is for them before they commit further.
Understanding your customer's lifetime value helps you to play the long game:
- You have an increased opportunity to engage with your customer and encourage them to upgrade.
- You have a chance to understand your customer better so you can personalize their experience and know which upgrades will suit them best and when.
- It helps you improve your relationship with your customer.
- It helps you predict the long-term success, profitability, and value of your business.
- It shows you where you need to improve your strategy for better results and higher profit opportunities.
It's not just about the numbers
Data is important at each stage of the customer journey and the synchronicity of that data as a customer moves on their journey is also essential so it's understood in context and appropriate analysis can be drawn. However, while all data is important some are more prevalent than others, and knowing what you want to achieve will drive the financial metrics that you track.
Tracking subscription metrics carefully will help you to understand where your business is today, where it is heading, and how to improve business success or pivot when (or before) issues arise. Every subscription business should monitor metrics related to acquisition, revenue, and retention, helping you to understand your customers, make decisions and take action with a view to continuous improvement and sustainable business growth.
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