Welcome to my blog post on the top seven data analytics software for subscription KPI metrics. As a serial entrepreneur, I understand the importance of tracking and calculating KPIs to ensure the success and growth of a business.
The subscription industry has been on the rise in recent years, with a steady growth rate of 12% annually. In order to stay ahead of the competition, it is crucial for businesses to focus on key metrics such as customer retention rate, monthly recurring revenue, and average revenue per user.
- Customer retention rate: measuring the percentage of customers who continue to use your services over a certain period of time;
- Monthly recurring revenue: calculating the amount of revenue a business can expect every month from its subscribers;
- Average revenue per user: determining the average amount of revenue a business generates from each user or customer.
These are just a few of the important KPIs that businesses should track in order to succeed in the subscription industry. In this blog post, we will dive deeper into the top seven KPIs and how to track and calculate them using data analytics software.
1. Customer retention rate
Definition: Customer retention rate is the percentage of customers that a business retains over a specific period. This KPI is used to measure how successful a company is in retaining customers and keeping them satisfied.
Use Case: Customer retention rate is a critical KPI for subscription-based businesses. It is essential to track this metric to ensure that customers are satisfied with the service provided and are likely to continue paying for it. Companies can use this KPI to gauge customer loyalty and identify areas to improve customer satisfaction and retention.
How To Calculate KPI: To calculate customer retention rate, take the total number of customers at the end of a given period, subtract the number of new customers acquired during that period, and divide it by the number of customers at the start of that period. Multiply the result by 100 to get the percentage.
Calculation Example: A subscription-based business had 1000 customers at the start of the year, acquired 200 new customers throughout the year, and ended the year with 900 customers. The customer retention rate for the year would be ((900-200)/1000) x 100 = 70%.
KPI Advantages: Tracking customer retention rate helps businesses determine the quality of their services, identify areas to improve retention, and ensure customer satisfaction. It also provides insight into customer loyalty and can help predict future revenue expectations.
KPI Disadvantages: Customer retention rate alone doesn't provide a complete picture of customer satisfaction and loyalty. A high rate doesn't necessarily indicate customer satisfaction, and a low rate may not indicate customer dissatisfaction. Companies must also consider additional metrics, such as churn rate, to gain a better understanding of customer behavior and loyalty.
KPI Industry Benchmarks: The average customer retention rate for subscription-based businesses is approximately 90%. Companies should aim to achieve a retention rate above this industry benchmark to demonstrate customer loyalty and a high level of satisfaction.
Tips & Tricks:
- Offer promotions or discounts to loyal customers to encourage them to continue their subscription.
- Solicit feedback from customers to address their concerns and improve retention.
- Develop a robust customer support system to ensure that customers receive timely and effective assistance.
Data Analytics Software Financial Model
Monthly Recurring Revenue
Monthly Recurring Revenue (MRR) is a KPI metric that measures the predictable and stable revenue generated by a subscription-based business model. MRR is a mirror to the business's sustainability and stability as it provides an accurate representation of the business's cash flow.
MRR is used to determine the business's growth rate, evaluate pricing strategies, and determine budget allocation for expansion. MRR is particularly useful when forecasting and budgeting for long-term reliability.
How to Calculate KPI
To calculate MRR, add up the total subscription revenue for a month, including upsells, downgrades, cancellations, and upgrades. The formula for MRR calculation is:
For example, suppose a business has 1,000 subscriptions at an average rate of $10 per user. Its MRR is:
- Stability: MRR measures the company's predictable and stable revenue stream, stabilizing the business in the long run.
- Scalability: Calculating MRR provides a way to predict future revenue and allocate resources accordingly, making the business easily scalable.
- Accurate Pricing: A company can use MRR to analyze its pricing strategies and determine its optimal price point accurately.
- No Adjusted Benchmark: Benchmarks for calculating MRR vary by industry, making it difficult to compare the business's performance against an industry-adjusted standard.
- Revenue allocation: As MRR is calculated based only on the subscription revenue, it does not give a clear picture of the business's overall revenue. Other factors, such as ad revenue, need to be included to get a more accurate picture of the business's finances.
KPI Industry Benchmarks For MRR
Industry benchmarks for MRR vary. Here are some examples:
- The B2B industry's average MRR is $3,146 per customer per month.
- The financial industry's average MRR is $955.04 per customer per month.
- The Marketing software industry's average MRR is $478.60 per customer per month.
Tips & Tricks for calculating MRR
- Include all subscription revenue in the calculation, including upsells, downgrades, cancellations, and upgrades.
- Track customer subscriptions that are in free trials, as they will convert to paid subscriptions after the trial ends.
- Constantly monitor MRR growth and compare it to industry benchmarks.
3. Average Revenue per User
Average revenue per user (ARPU) is a key performance indicator (KPI) used to measure the average revenue generated by each user or customer over a specific period.
ARPU is useful for businesses that offer subscription-based services or products. It helps measure the effectiveness of pricing strategies, customer retention, and overall revenue growth.
How to Calculate KPI
To calculate ARPU, divide the total revenue generated by the total number of customers or subscribers for a specific period. The formula is as follows:
Suppose an online video streaming service generated a total of $10,000 in revenue from 2,000 customers in the past month. The ARPU would be calculated as:
- ARPU helps identify pricing strategies that maximize revenue and customer engagement.
- It provides valuable insights into customer or subscriber retention rates.
- ARPU can be used to predict future revenue and forecast overall business growth.
- ARPU does not provide insights into individual user behavior or engagement metrics.
- The calculation can be distorted by outliers or changes in customer behavior.
- ARPU is not a holistic measure of business performance and should be used in combination with other KPIs.
KPI Industry Benchmarks for the KPI: 'Average Revenue per User'
The average ARPU varies significantly depending on the industry and business model. For example:
- The telecom industry has an ARPU of $40-$50 per month.
- The streaming and media industry has an ARPU of $10-$15 per month.
- The SaaS industry has an ARPU of $100-$200 per month.
Tips and Tricks:
- Track ARPU over time to identify trends and seasonality.
- Compare ARPU across segments or customer types to identify opportunities for growth or upselling.
- Use ARPU in combination with other KPIs such as customer acquisition cost (CAC), customer churn rate, and customer lifetime value (LTV) to gain a more comprehensive view of business performance.
4. Churn rate
Churn rate is a metric that reveals how many of your customers end their subscription during a given period. This is crucial to track as it shows how well your products or services are retaining customers.
Churn rate is essential for businesses that rely on subscription models. This KPI helps you identify potential problems that your product or service might be facing, such as customer satisfaction or a lack of value. By measuring churn rate, businesses can fine-tune their offerings to improve customer retention and profitability.
How To Calculate KPI:
To calculate churn rate, you need to know the number of customers who have left during the given period and the total number of customers at the start of the period. Use the following formula:
Suppose you had 1000 subscribers at the start of the year, and 200 of them canceled their subscriptions within that period. Using the churn rate formula:
This means that your business has a churn rate of 20% for the year.
- Allows businesses to identify issues with their product or service that might be causing customer dissatisfaction or lack of value
- Helps businesses fine-tune their offerings to improve customer retention and profitability
- Provides businesses with a clear understanding of their customer base and how it changes over time
- Churn rate does not reveal why customers have left, only that they have left.
- External factors such as economic conditions, competitor offerings, or industry trends can influence churn rate even if the product or service is well-designed.
KPI Industry Benchmarks:
Churn rate benchmarks vary by industry and the types of products or services offered. In general, low-single-digit rates are considered good, while rates above 10% are troubling. However, even a 1% change in churn rate can have a significant impact on a company's revenue.
Tips & Tricks:
- Offer incentives to help retain customers, such as discounts or free trials.
- Monitor customer feedback to identify potential issues and fix them before they cause churn.
- Analyze churn rate in conjunction with other metrics, such as customer lifetime value, to get a better understanding of your customer base.
5. Net promoter score
Net promoter score (NPS) is a customer loyalty metric that measures the willingness of customers to recommend a company's products or services to others. It helps businesses to understand the level of satisfaction and loyalty of their customers.
NPS can be used by businesses of all sizes to assess customer loyalty and satisfaction, and to identify areas for improvement. It is often used in industries such as telecom, retail, healthcare and banking.
How To Calculate KPI
The formula to calculate NPS is:
- Promoters are customers who rated the business 9 or 10 on a scale of 0 to 10.
- Detractors are customers who rated the business 0 to 6 on the same scale.
Let's assume that a business has received 200 responses to their NPS survey.
- 100 respondents rated the business 9 or 10 and are considered Promoters.
- 50 respondents rated the business between 7 and 8 and are considered Passive.
- 50 respondents rated the business 0 to 6 and are considered Detractors.
The calculation of NPS would be:
- Simple and easy to understand
- Provides a standardized metric for comparing customer satisfaction across time and different businesses
- Has a strong correlation with business growth.
- NPS alone may not be enough to predict customer behavior or loyalty.
- It can be influenced by factors beyond a business's control such as the customer's previous experience or expectations.
- It focuses only on customer recommendation and does not take into account other factors such as customer retention or repeat business.
KPI Industry Benchmarks for the KPI: '5. Net promoter score'
Industry benchmarks for NPS vary by industry, but on average a score above 30 is considered good and a score above 50 is considered excellent. Some industries, such as luxury hotels or airlines, have average scores as high as 70.
Tips & Tricks
- Regularly monitoring your NPS score can help you identify trends and areas for improvement.
- Use open-ended questions in your surveys to gain additional insights into the reasons behind customers' ratings.
- Compare your NPS score with those of your competitors to gain a better understanding of your market position.
6. Customer acquisition cost
Customer acquisition cost (CAC) is a metric that measures the average cost incurred to acquire a new customer. It encompasses all the expenses incurred in acquiring and onboarding a new customer. These expenses may include marketing costs, sales commissions, software platforms, and other direct and indirect costs. The CAC metric helps businesses understand how much it costs to acquire customers and if their customer acquisition strategies are efficient and effective.
Businesses use CAC to assess the financial viability of different customer acquisition strategies. By calculating the CAC, businesses can assess the profitability of their customer acquisition efforts and make informed decisions about how to allocate their resources. For example, a business may compare the CAC of its social media advertising campaign to its email marketing campaign and determine which is the more cost-effective route for acquiring new customers.
How To Calculate KPI
The formula for calculating CAC is as follows:
If a business spent $10,000 on marketing and sales efforts in a given month and acquired 50 new customers, the CAC would be $200 per new customer.
- Helps businesses understand the efficiency and effectiveness of their customer acquisition strategies
- Can be used to optimize resources spent on acquiring new customers
- Provides insights into marketing and sales performance and ROI
- Can be influenced by outside factors such as market conditions and industry trends
- Does not account for returning customer or lifetime customer value
- May not be precise or accurate due to challenges of tracking expenses for every customer acquisition channel and touchpoint
KPI Industry Benchmarks
The average CAC can vary greatly depending on the industry and company, but some studies suggest that the average CAC is around $300 in B2B markets and $100 in B2C markets.
Tips & Tricks
- Regularly track and analyze your CAC to identify trends and opportunities for optimization
- Consider additional factors such as cost per lead and customer lifetime value when evaluating the effectiveness of your customer acquisition strategies
- Experiment with different acquisition channels and tactics to determine the most cost-effective approaches for your business
7. Lifetime value of a customer
Lifetime value of a customer (LTV or CLV) measures the total revenue that a customer brings to your business throughout the duration of their relationship with your company. It is a crucial KPI to track as it helps businesses to understand the financial value of their customers and make informed decisions on marketing strategies, customer retention, and pricing.
LTV is particularly useful for businesses with subscription-based models as it helps in predicting the future revenue potential of the customers. By analyzing individual customers' LTV, businesses can segment them based on their profitability and develop targeted marketing strategies to retain high-value customers and acquire similar ones.
How To Calculate KPI
- ARPU (Average Revenue Per User) = Total revenue / Total customers.
- Gross margin % = (Total revenue - Cost of goods sold) / Total revenue.
- CCR (Customer Churn Rate) = Number of customers lost during the period / Total number of customers at the beginning of the period.
LTV = ($100 x 60%) / 5% = $1,200
Therefore, the LTV of each customer is $1,200.
- Helps in identifying high-value customers and developing targeted marketing campaigns.
- Assists in pricing and testing various subscription models.
- Indicates the overall health of a subscription-based business and the potential revenue it can generate.
- Doesn't account for the time value of money, so all future earnings are treated as equal.
- May not be accurate for businesses with a high customer churn rate or those with an inconsistent revenue stream.
- Depends on the accuracy of customer retention and revenue projections.
KPI Industry Benchmarks
The average LTV varies across industries and business models. In general, an LTV to Customer Acquisition Cost (CAC) ratio greater than three indicates a healthy business model. However, it is essential to compare LTV against industry benchmarks and competitors.
Tips & Tricks
- Regularly track LTV of customers to make informed business decisions.
- Use customer feedback and satisfaction surveys to identify areas of improvement and increase LTV.
- Offer incentives or discounts to high-value customers to retain them.
In conclusion, tracking KPIs is essential for any business in the subscription industry. By utilizing data analytics software and focusing on key metrics such as customer retention rate, monthly recurring revenue, and average revenue per user, businesses can make informed decisions that lead to growth and success. Additionally, monitoring metrics such as churn rate, net promoter score, customer acquisition cost, and lifetime value of a customer can provide valuable insights into the health and trajectory of a business. By leveraging data and analytics, businesses can stay ahead of the competition and continue to meet the evolving needs of their customer base.
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