Background on KPIs for subscriptions

When your business generates a significant portion of its revenue from subscriptions, it is highly valuable to closely analyze this revenue to actively manage it. Several KPIs (Key Performance Indicators) are available for this purpose, which can be found in the subscription reports in Simplicate.

This article provides background information on these KPIs and how they can be useful within your organization. The functionality of the subscription report itself is explained in the article below:

Monthly Recurring Revenue, often abbreviated as MRR, is probably the most important KPI for a subscription service provider. It highlights the strength of your business model. Each new customer generates recurring revenue, which is significantly different from traditional sales as it focuses on ongoing revenue rather than one-time sales. However, this also introduces the challenge of preventing churn (cancellations).

There are different ways to calculate MRR.

This method, used in Simplicate, is more intensive to calculate but provides the best insight into your business. For each paying customer, you calculate the monthly revenue. Annual, semi-annual, and quarterly subscriptions are converted to monthly figures.

You then add these amounts together. For example, if Customer A pays €200 monthly and Customer B pays €2000 annually, your MRR would be €366.67 (200 + 2000 / 12).

A quicker way to calculate MRR is to take the average monthly revenue and multiply it by the number of customers. Simplicate does NOT use this method, but we share it for your information.

The average revenue per customer is also known as ARPA, Average Revenue Per Account. By multiplying this by the number of customers, you approximate the MRR.

MRR = ARPA * #customers

Equally important as the value of MRR is how it develops. Not only new customers are important for this. You can divide MRR development into 3 categories:

• New MRR

• Expansions/Reductions of current MRR

• Cancellations (churn)

You want to measure these 3 categories individually. The reason is that you want to be able to manage all 3. If your MRR is not growing, it might not be due to the number of new customers. It could be that customers are canceling at the same rate as new ones are joining. In that case, it is important to solve that problem, and your focus does not need to be on acquisitions. In this regard, these 3 KPIs might be even more valuable to manage than MRR alone.

Simplicate also displays all these KPIs in the subscription report.

Customer Lifetime Value (CLV) is an indicator of the revenue your business derives from a customer over their entire period of being a customer. The goal is to gain insight into the financial value a customer has for your business. This can be specific to each customer or for all your customers in general.

Customer Lifetime Value allows you to make important decisions regarding sales, marketing, product development, and customer success. For example, you can determine:

• How much can I spend to acquire a customer?

• Who are my best customers, and how can I tailor my services to them?

• How much can I spend to retain a customer?

• What type of customer should we target?

The calculation of Customer Lifetime Value is based on churn and the average customer value.

CLV = ARPA * (1/churn)

(1/churn) represents the expected time a customer remains, the customer lifetime. If churn is given as a percentage per month, the customer lifetime is also in months.