WHICH METRICS ARE IMPORTANT?
BREAK DOWN YOUR SUBSCRIPTION STARTUP
You might be running a SaaS startup or a consumer subscription service, no matter the case, here follows a guide on how to break it down piece by piece to identify the metrics that are important for you.
The Action Metrics Tree is optimal to get an overview of the company. It makes it clear for a CEO to communicate the top to the investors, study the marketing branch with the marketing team and the retention and churn with your product team. This article follows up on How to Get Started with Metrics, if you haven’t read it, I recommend you do that before getting through the article that follows here.
To achieve your goal of fast growth, you need to realize that a business is full of levers to pull and push. It is crucial to identify these connections that can help you push the needle in the right direction. To connect your actions to what can actually achieve growth, it is useful to recognize correlation and causation relationships between the different metrics. This example dashboard will help your startup team to easily each month understand what has happened to your business and make you better at taking the right decisions to succeed.
This dashboard might not fit your exact business model and Excel is definitely not the optimal tool to use for your recurring metrics reporting. I recommend you to use this dashboard as inspiration for when you build up your internal reporting in a Business Intelligence tool. To be able to look closer to this dashboard, please download it here.
Here follows a screenshot of a breakdown of an example subscription business, let’s say that it is a budget app for consumers to simplify the discussion.
Let’s start from the top and then we’ll work our way down:
MRR – Monthly Recurring Revenue
This is your monthly revenue and since you run a subscription business, it is recurring. For this business, it seems like it has gone up a bit since previous month by 8 %, nice! For an average subscription business 1 or 2 years after launch usually achieves 15-20 % or monthly increase in MRR. But where does the increase come from? How did we arrive here?
ARPU – Average Revenue per User
This metric shows you how much you earn per user. For the simplicity of this case, we’ve said that there is a fixed price per user, a bit like you have for Spotify or Netflix, and that is why it hasn’t changed since last month. If you have multiple prices, you would see how the average changes and underneath you would split the sum to see the number of customers using one pricing or another. If you are instead offering a B2B SaaS you might rather call this ARPA (Average Revenue per Account) since you might have a customer with multiple licenses. So, if your customer adds licenses you should here see how ARPA increases.
Here you can see how the number of customers has changed since last month, observe that: Customers + ARPU = MRR. This means that these two are ultimately the only two levers you can pull to increase your MRR and since the number of customers increased by 8 % and ARPU by 0 %, MRR ultimately increased by 8 %. Now we’ll continue to break down how we came to this result.
The number of new customers who signed up for the subscription, which was the same as last month, 20, which represents 15 % of total customers.
From last month, we have another 115 customers that stayed which is 15 % more than last month, hurray! Maybe we have added a new feature which makes customers stay on their subscription? Here we can also see our retention rate which is at 96 %, this means that from the customer group that we had last month, 96 % continued their subscription. This metric, together with your churn are easily the most important if you’re running a subscription business. Your retention rate says a lot about how much value you create for your customers if you don’t create value for them they will leave and decrease the total retention rate. Your retention rate also reveals how well your customer acquisition investments will pay off, you might be able to convince many customers to join but if they quickly leave your return will anyhow be low.
This is the number of customers from last month that have left, which represents 4 % of the customer base we had last month. There is, therefore, a 4 % chance that any customer from last month canceled their subscription. As you probably understand now, the churn rate is showing the opposite to the retention rate and it is of course equally important to decrease as the retention rate is important to increase. Usually, for SaaS business, a churn rate is considered good when being under 5 %. The startup in the example has done a great job of decreasing their churn since the last month by 50 %.
This is an estimation of how long customers will stay subscribed based on our churn rate. As in this case, there is a 4 % risk of any customer to churn, and if that number holds the average subscriber will stay for 27 months. Since this app has managed to drastically decrease their churn, we can see the difference in Life Time increasing by 125 % from 12 to 27 months.
Trials and Trial Conversion Rate
If we now look below “New” we can study the sales funnel from marketing spend to trials and new customers. To make this part relevant to this month’s revenue change it shows the results from the month before, as trial users become customers after their 30-day trial. If you don’t offer trials or work in a different way, adjust the funnel to represent your process.
Regarding the trials of this startup, we see that 40 potential customers signed up for the trial and 20 finally decided to join the service as a paying customer. In absolute numbers, this is great as it increased by 33 % since last month, but watch out since this is a typical case of vanity metrics. The conversion rate is then 50 %. The startup has decreased the conversion rate by 25 % over the past month so there is a clear room for improvement, even though at first sight this month’s numbers looked good. This is a typical example of how we go from vanity metrics to sanity metrics to find out if our results are good for real or not.
Site Visitors and Conversion Rate
This startup had 300 visitors on their site, and since 40 % of them converted to trials, we have a conversion rate of 13,3 %. The same is true here, at first, it looks that we have obtained very encouraging results, as the number of site visits increased by 50 % but when we look deeper, we see that the conversion rate actually decreased by 11 %.
The startup spent 700 € on marketing, which is an increase of 40 %. It is very important to here also include any staff costs if you have any growth hackers or sales representatives. It seems like the business has tried to accelerate to increase their growth. On the other hand, it seems like it didn’t go all the way since the final increase in revenue was only 8 %. Thanks to this dashboard we can see exactly where the problem is. The biggest problem is to convert trial users into customers. It seems like they have either spent marketing costs on a target group that might not be prepared to pay for the service that they offer or the communication. Another alternative might be that the marketing message has changed which interests ad viewers to visit the site, but they seem to be disappointed with their trial and therefore don’t subscribe at the end of the trial.
LTV – Life Time Value
Up to the left corner of the dashboard, we see our LTV. Since the Life Time of our customers is 27 months and they pay 5 euros per month our LTV becomes 135 euros.
CAC – Customer Acquisition Cost
Underneath we see our marketing cost per new customer. It is calculated by taking the total marketing spend and dividing it by the number of new customers.
This is a very important metric since it gives an insight into the startup’s profitability and future potential. By dividing our Life Time Value by our Customer Acquisition Cost, we get a quite good idea of the profitability level of a startup whose main variable cost is marketing. The recommendation is to be at least at 3-4 but the higher the better. Having a satisfying LTV-CAC ratio means that we get back the money we spend on acquiring a customer and can organically finance acquiring more customers. As this metric reveals both the efficiency of the sales funnel and the value customers find in your service, it is a great number to be able to show off to investors. Some people believe that when a business has managed to achieve a good LTV-CAC ratio, it means that the product-market fit has been found which means that you have found a sustainable business model and it is time to hit the accelerator.
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