Understanding Subscription Analytics

• Access key metrics like MRR, LTV, churn rate, and other important analytics essential to your subscription business.
• Use heat maps to get a global view of your business, uncovering opportunities for expansion, and ensuring your business is focusing on the right regions.
• Segment customers into custom lists to understand who’s driving the growth of your business and answer complex questions around where to invest next.

And now for our regularly scheduled program …

Subscriptions Are Different From Perpetual Licenses — Don’t Treat Them the Same

In traditional ecommerce, software was sold as a perpetual license, and one of your primary measurements of success was your conversion rate. To succeed and grow, all you had to do was generate more traffic and raise conversion rates.

The subscription model upends this whole notion of success. In addition to acquiring new customers, your subscription business must focus on building long-term relationships, and that means shifting the focus of your KPIs.

Although initial transactions are essential to sustaining your revenue, subscription success really lies in maximizing renewals.

Instead of asking transaction-centric questions like, “What was our conversion rate last month, and can we improve it by a couple percentage points next month?” here’s the type of question that will be a lot more valuable to your subscription business: “We know that adding additional offline payment methods increases conversion rates in certain European countries. Will offering those region-specific payment methods increase initial conversion rates and subsequent renewal rates? Or, will it increase the former but reduce the latter?”

When you focus on maximizing renewals and ask these types of questions, you’re setting your business up for subscription success.

But asking the right questions won’t help if you haven’t adopted the right KPIs.

Subscription KPIs Are Different — Don’t Treat Them All Equally

Advanced reporting and analytics are critical to every subscription business’ success. But to take advantage of your data, you must adopt metrics that are focused specifically on subscription analytics. We discussed some of these more deeply in a previous post, but five of the most important KPIs to a company selling subscriptions are:

• Annual or monthly recurring revenue (A/MRR)
• Churn rates
• Customer lifetime value (CLV)
• Customer acquisition cost (CAC)
• Average revenue per account (ARPA)

Just some side notes about these subscription KPIs:

• It is VERY important that your CAC is lower than CLV. Ideally, you want this number to be higher than a 2-to-1 ratio.
• Another potentially important KPI is the number of months it takes to recover your CAC. This is calculated by: CAC / ARPA. This number will tell you how many months a customer needs to be your customer to cover the cost it took to acquire them in the first place.
• ARPA is calculated by: The sum of all your customers’ MRR / # of customers.

However, even if you define the right problems and ask the right questions, if you don’t segment your customers properly, your quest for data-driven insight is doomed from the start.

Subscription Users Are Different — Don’t Treat Everyone the Same

The free-trial user who became a paid subscriber and then dropped off at the first billing interval does not hold the same value to your business as the customer who subscribed for nine months and then churned away. And that customer isn’t nearly as important as the customer who has been with you for 18 months. Your limited and, therefore, precious resources should be dedicated to those areas where they can make the biggest impact on your business.

But subscription companies too often focus on acquiring to the detriment of retaining. So you try to bring on a bunch of customers with discounts. This helps you get that initial transaction. And yes, that is important. You have to acquire new customers in order to grow. But is that customer who signed up with a discount on his first month going to stick with you for the next 24 monthly renewals? Or the next two annual ones? Spending all your time and money trying to acquire new users who may or may not be there for you next year is not an effective strategy without an even stronger focus on retention.

Instead, focus on power users.

Here’s why:

Not only are they the ones using your product to its fullest, they’re also your advocates to the rest of the market. On top of that, they’re the people who are going to provide the best feedback about your product.

The customer who only signs up to use your product for a week because they had an urgent need won’t provide the same quality of feedback as your loyal customers who have a sustained need for your product.

Those power users are the ones who can tell you what your product’s real strengths and weaknesses are. Why do they love your product and what would make them even happier? That’s invaluable information, especially in this era of customer experience where fickle customers are quick to jump ship in favor of the latest technology or the equivalent technology at a more affordable price.

Keystone

To successfully implement subscription analytics, first define what your goals are, and then determine which data is important to helping you achieve that goal. And don’t forget to segment your customer database into useful categories.

Ryan Sheppard has spent the past 15+ years in ecommerce, digital marketing, software/systems development and consulting services, working for companies such as Gartner, Guidance, Lyons Consulting Group (capgemini), and Kensium. Ryan is the Practice Director of Pixafy and Master in Computer Science with a focus on Ecommerce Technology candidate at DePaul University.