The following are some key metrics that can help you make sense of your business, and if you track these over time, you can see if you're headed in the right direction:
Customer churn (Churn): People who don't renew their subscription. This is easy to measure month to month, you just count the number of subscribers who don't renew. To get a percentage, you divide the number of cancellations/non-renewals by the starting count of subscribers. For example, if you start June with 100 subscribers, and 5 leave over the course of the month, your churn for June would be 5/100 = 5%. The significance of churn is that you need that percentage to be lower than the growth, or you'll be out of business pretty quickly.
Customer growth (Growth): People who subscribe - woohoo! This is also easy to measure month to month, you just count the number of new subscribers during the month, and divide by the number you started with. For example, if you start June with 100 subscribers, and 10 new ones join over the course of the month, your growth for June would be 10/100 = 10%. This number should be higher than churn. It's also one reason the expression "If you're not growing, you're dying" isn't just an abstract concept. In a subscription business, it's the hard truth.
Customer Acquisition Cost (CAC): How much it costs to acquire a new subscriber, including advertising, followup, discounts, etc. CAC for a given month would simply be your total marketing and sales costs across all channels, divided by the number of new customers acquired that month. So again, if you spent $2000 in June, and landed those 10 new customers, your CAC is $200 per customer. Is that good or bad? See the next two items below to find out.
Average Revenue Per Customer (ARPC): How much you earn per customer in a given time period. This one is easy - we figure out the total revenue from customers in a given month, then divide by the number of customers. If we make $1000 in June from our 100 customers, then our ARPC is $1000/10 = $100. More on this number below.
Lifetime value: How much an average customer will spend with us over the course of our relationship. This is a harder number to come by, but it's based on the Churn number from above. Lifetime value (LTV) is useful to understand, because you can use it to decide how much to spend to acquire a new customer (hint: the cost to acquire should be LESS than the LTV of a customer). If you're in the early stages of a startup, though, you really don't know how long your customers are going to stick around yet. You probably need at least a year's worth of data before you have a good sense. But that won't stop us from trying - here's a quick and dirty formula for estimating lifetime value:
LTV = (1/Churn) * ARPC
So what this means is that we can get a decent guess at LTV based on our churn, and average revenue per customer. This will shift over time, but it's better than nothing, and can be surprisingly accurate.
In our example, if we've been operating for 6 months, and have 100 subscribers, and the average monthly churn is about 5% (in June we lost 5 of 100), and we're making about $100 per subscriber monthly, our LTV looks like this:
LTV = (1 / 0.05) * $100 = $2000
That's pretty good! With that number ($2000 LTV), we might be able to spend a little more to acquire a customer. To leave a large margin for error, we might decide to spend up to $500 to acquire a customer. Of course, we'd first have to make sure any marketing channel we chose will actually deliver the right kinds of customers, and that they will convert at the rate we expect. Uh oh, we haven't talked about that yet...
Conversion rate: What percentage of our new leads will become customers? If you offer trial versions, then you'll have two other values to consider - the lead to trial conversion rate, and the trial to customer conversion rate. Knowing your conversion rate, not just overall, but also by source (referrals, Google ads, magazine ads, search engine results for specific keywords, etc.) can give you insights into where to focus your marketing resources.
You can use all of the above to project new subscribers, churn, and revenue for your business, updating it with actual values on a monthly basis to keep it accurate. Here's a sample set of projections you could make (there are others, but hopefully this demonstrates what you can do with these metrics):
Est. New Subs = Growth * Existing Subs
Est. New Revenue = Est. New Subs * ARPC
Est. Retained Subs = Existing Subs - (Churn * Existing Subs)
Est. Recurring Revenue = Est. Retained Subs * ARPC
These numbers are a good start, but they are missing something - a correlation to the state of the product or service. For example, in the very beginning of a startup product or service, you might expect churn to be a little higher, simply because the product isn't that great initially. But I'm out of room, so that will have to wait for a later post.
How are you measuring business performance?
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