What to track when running a subscription-based business model
The subscription-based business model is no longer the preserve of magazines and home security systems. Today, we’re seeing it employed in a variety of other markets, including everything from software to education to physical products.
In order for these operations to be profitable and sustainable, however, they require constant optimization. If you get the right data in hand, it becomes a lot easier to know which direction to take.
Five KPIs and metrics worth tracking
The subscription business model isn’t new, but today it’s become workable and even as valuable today for new lines of business as it was decades ago. Subscription sales yield an array of potential benefits, including predictable revenue, higher customer lifetime value, easier opportunities for up- and cross-selling, and greater customer loyalty.
In non-traditional industries, like men’s grooming, it has a way of differentiating a business from the pack.
Another benefit of running a subscription business is that the owner gets access to mounds of useful data. And if you employ the data strategically, you can learn a lot about who your customers are and what they might want.
In order to gain such insights, though, you have to home in on the appropriate key performance indicators (KPIs) and metrics. Here are a few that we recommend you try to keep tabs on:
1. Customer Acquisition Cost
A successful business has to know exactly how much it costs to acquire each customer. Once you have that information, you can run projection models that will help you predict fairly accurately how many new customers you will be able to onboard over a given period of time.
For example, if you know it costs you $17 to acquire a new client, and you have a budget of $75,000 for the next 90 days, you can calculate that you should be able to bring in somewhere around 4,400 new customers.
Second, customer acquisition cost helps you zero in on profitability and figure out how much you will have to charge in order to reach various desired profit levels.
2. Growth vs. Churn Rate
Churn, also known as attrition, is a critical concern. This is the rate at which you lose customers each month. (If you have 1,000 total members and you lose 150 each month, your churn rate is 15%).
Conversely, your growth rate is the number of new members you typically land each month. In order to expand your customer base, you obviously need the growth rate to be higher than your churn rate.
3. Impact of Dues Increases on Renewal
According to one study, dues increases of less than 20% do not typically result in a substantial drop in overall renewal rates. Anything above 20% does tend to damage retention rates, however.
Frequency and timing also matter. 'The more often you raise dues, the less the amount should be', Membership Works advises.
'If you wait too long and have to go with a high percentage, you risk member anger. Smaller increases on a more regular basis can train your members to expect that increases will happen.'
In terms of data, you should be tracking the impact your dues increases have on the renewal rate. In other words, what percentage of your member base renews when you raise your prices versus what percentage cancels or lapses.
4. Lifetime Value
Lifetime value (LTV) is worthwhile to know in every business model, but that’s especially the case with subscription-based companies. This number can be hard to pin down, but it’s worth a serious attempt to obtain. It helps determine what your sustainable customer acquisition cost will be, and when it makes sense to invest more in this area.
5. Member Engagement
No concrete metric tracks member engagement across the board, but you’d do well to look for key performance indicators in your data. If you run a membership website, you might study the number of times a member logs on per week.
If you sell a solid consumer item, a useful metric would be the frequency with which a customer reorders that product. In essence, you’re looking for signs that people are interacting with you on an ongoing basis.
Leveraging insights for growth
We live in a digital world where data and data collection are ubiquitous. Companies have millions of data points available to them at their fingertips. But how many of these firms are actually making serious use of the loads of information they possess?
It’s one thing to have a lot of raw information and various isolated insights. It would be something else entirely to be able to leverage those insights in a way that optimizes, expands, and improves your ongoing operations.
So as you gather data and analyze certain metrics and KPIs, make sure you have a plan in place to make great use of those numbers… or develop one as soon as possible based on what your metrics are hinting to you. You’re either going to sink or swim with this; there isn’t much in-between.
Author: Larry Alton