4 Key Metrics for Your Subscription Business

Editor's Notes

• #3: Steve who is the CEO of Fusebill has over 20 years of experience in leading high-technology and software companies, most recently as VP and General Manager with j2 Global. His expertise in subscription billing comes from years of building and extending large scale billing systems for SaaS companies. For example he helped propel Protus into one of the fastest growing companies in Canada, with over 555,000 subscribers, before it was acquired by J2 Global in 2010. Steve also worked at Spotwave Wireless, CrossKeys Systems Corporation, Corel and Nortel and is a graduate of the University of Waterloo and the Ivey School of Business.
• #5: Subscription, and other recurring revenue businesses are different because the revenue for the service comes over an extended period of time (the customer lifetime). If a customer is happy with the service, they will stick around for a long time, and the profit that can be made from that customer will increase considerably. On the other hand if a customer is unhappy, they will churn quickly, and the business will likely lose money on the investment that they made to acquire that customer. This creates a fundamentally different dynamic to a traditional software business: there are now two sales that have to be accomplished:- Acquiring the customer - Keeping the customer (to maximize the lifetime value).
• #7: The chart from the Fusebill dashboard shows that when you add customers over time the chart grows and shows you a nice trend of growth for a few years and then levels off indicating that people are not necessarily leaving but you are not adding more people either.MRR what am I expecting to get month after month
• #9: Don’t count customers that are not paying you (no invoices, stopped paying credit card, or explicitly cancelled and the service has not been turned off)Focus on the customers that are moving forward with you rather than the ones that are not paying you and focus what is going to be coming in month after monthUsage charges can sometimes be linked with recurring billing, but really the usage is seasonal, or variations in month to month depending on the userEncourage your business to consider whether you want to include the usage fees in your MRR (For Example at Fusebill, we strictly focus on the recurring aspect of billing)
• #10: Heartbeat measure: is this month better than last month?- Month over month trends to compare customer satisfaction- I like focusing on monthly timelines, distinct from quarterly or annual, because with subscription sales you cannot make up lost sales from the month. - Every month that you do not make a sale, it is a lost month of subscription revenue, it is important to keep on top of it and look at it in individual pieces (monthly).Certainly lot of businesses look at it on a daily basis, but you try to normalize a month’s worth of revenue.When people talk about MRR, you will see CMRR, which is committed or contracted business and this is more important for B2B businesses that typically sell for a three year contract. At that point you have locked into a minimum value and you have got clear amount of revenue coming in for future periods. Contrast that with a small business month to month basis where your customers can leave. When building that contracting piece, you typically sell most of your business by contracts.Ex. If you sell a 3 year contract but the customer can terminate within 30-days, that not really much of a commitment because that is 1 month commitment, not 36 months.We also encourage people to segment their customer base, looking at the MRR by different segments. For example, look at customers that are actively using the service vs. those who might just be paying for it and not using it. That active and engaged definition gauges by company, but it might be logging in, using the service. The view that your less active and engaged customers are more likely to churn and drop away, so part of your MRR is probably a subset of that.
• #11: Chart shows:3% churn offers 3 year revenue of $2,2203% churn after 3 months offers 3 year revenue of $1,320Using to look at what your MRR will look like in the future as the reality is that not all customers will stick around forever.Inverse quota: how many customers are leaving from our customer base?Sales quota: how many customers are coming on? The chart integration highlights an important point on time measurement These charts illustrate similar churn rates blue being 3% consistent month after month and the red being an average of 3% churn kicking in after the first 3 months and that is the observation that occurs with most new customers and thus you generally have a higher churn rate at that point, but you end up with a different customer value and different customer lifetime by the two different curves. So I encourage people to look at month over month churn, not just long term ** churn.
• #12: Churn is the direct opposite of growthAs your customer base gets very large, it really begins to limit your growth if churn is substantial because you cannot add enough new customers to replace those that leaveLimits growth – cannot add new customers fast enough to account for losses Satisfaction indexChurn is also a great measure of customer satisfaction, happy customers who are finding satisfaction with the company do not churn as often; thus a spike in your churn signals that you must look at your customer satisfaction rates if they are not staying. 
• #13: Measurement Issues: Pick One and Be ConsistentCounting customers at all The biggest measurement issue that we find is that they don’t know how many active customers, how many paying customers, much less how many they used to have and have lost. Having the systems In place to calculate and maintain your history of customer accounts really matters.Defining a cancellation Stops using services Stops paying for service Does not pay for 60 days (grace period before the system is turned off)Time periods Daily drives you, but monthly is goodStatistical anomalies Comparing monthly and quarterly churn Number of cancellations divided by the average number of customers in a period of timeImportant thing in the number of cancellations is that you start at the beginning of the month which is how many customers you start with until the end of the time period when you add on the number of new customers you brought on and then subtract the end number of customers. This difference is the number of people who have left (some are new, some are old) but this is the total churn rate.
• #14: What I defined earlier was really customer churn because it is a good measurement where for example it is a single product company where there is one customer with one product equals the same dollar amount because your customers are similar enough that the variation does not matter. It is a simple place to start. Revenue Churn is important if your customers are not all the same size. For example if you sell the product to both small online business customers and to a sales team to enterprise customers or having a $10 customer and a $1,000 customer, clearly the churn or loss of that enterprise customer is much more important than one of your smaller customers. Revenue churn does the same sort of calculations in relation to loss from your subscriber base by using the revenue of each customer separately and that is very important in a lot of B2B businesses. Segmentation: Churn of new customers is to be much higher in new customers than in old ones in the initial onboarding trial before they hit the continuing usage when most new customers would drop out. The perverse effect that has on churn rates is that if you have a successful sales rate, your sales spike up and some are lost during the month, thus your churn rate actually goes up, so segmenting and figuring out younger customers versus older. This leads to the idea of looking at cohorts (a group of similar lifestyle customers).
• #15: - Chart shows a cohort of customers, pretending that they all came in on the same day, displaying it horizontally: the length of time the account is open in days. The spikes are probably for the amount of customers that are going to churn on any given day. The green smooth chart is the percent of customers that have left after a certain period of time. - In the early part of the chart, there are significant churn rates because as the Free Trial Ends on thirty days, the churn rate spikes significantly when people cancel or the account is turned off. From a Billing perspective, you can spot every thirty days when credit cards got charged or invoices were sent out because for some businesses, they forget they are using the service and the billing is a reminder that they are still using it. There are bigger spikes every 12 months, which correlate to people who are on annual plans and forget about it or have an unexpected charge by which they cancel.
• #16: The Chart Illustrates:Red as customer acquisition cost where the green cumulative contribution moves towards a breakeven point at about 17 and then profit occurs in the later part of the customer lifecycle. By graphing you want to move your breakeven point as early as possible by manipulating meters like reducing the customer acquisition cost or increasing the earlier revenues. Since the profit comes at the end of the life-cycle, you want to prolong your customer relationship because the longer the customer lifetime, the more your profit region will increase. When we do our business modeling here at Fusebill, we build it up from the ground up model with expected revenue flow, cost of all of our customers, and add up our cash flow projects and revenue projections.
• #18: The application of CLV drives home the value of customer base that contrast a lot of other businesses that focus on new sales and new customers coming in, draws attention to customer retention and satisfaction.
• #20: A great way to measure external marketing coming in relating to revenue coming in and to prepare marketing programs to make sure you are putting money behind those programs that bring in customer and lowest cost effect. Like to see cost of acquisition over time because if your acquisition cost spikes up then your customer lifetime value decreases unless you can compensate with more revenues from that customer over longer period of time.
• #21: The more narrow the definition, the more narrowly you should be applying that scopeWhat you should not do is only look at your market cost and assume that is your full cost of acquisition if you have other costs that really should be built into that otherwise your customer lifetime value will not make much sense.
• #24: This dashboard provides real time monitoring of key business metrics – customer acquisition, revenues, product mix, ARPU, MRR.is intended to be used daily by managers and executives that want an overall view of the health of the business. The reports are concise and easy to understand, and complement the portfolio of detailed reporting on customers, products, revenues and other financial metrics. Fusebill is built not just to be a billing system but to help make some of the data talked about more accessible. The executive dashboard is for executives really shows year to date progress in terms of new customers, revenues, what products are being sold, how monthly recurring revenue and average revenue per user are increasing but also lets you drill in to looking at the lifetime value for customers seeing how that changes over time. This can be segmented, looking at different products or customer sources . You can also see signups and cancellations by product, churn but it’s important these metrics, are intrinsic metrics in the system and are brought up in a way that makes them accessible to marketing people – and that’s separate from the whole “how do I go and collect money from my customers” point of the system. We really wanted to make a point of making a service where you can get data out of the system to make it usable an actionable.