Key performance indicators (KPIs) can be thought of as the most crucial metrics in your business to determine your quality of performance and ultimately the success of your subscription box.
There are many potential KPIs, and they differ from department to department. Some are involved with the financial operations of the business, and others reflect how well you provide customer service or fulfill your product. As a business owner, once you identify these metrics, you’re poised to improve operations, increase revenue, provide a better service for customers, and make your business more sustainable. Even Harvard Business School agrees: “You are what you measure.”
In this guide, we’ll be going over the most important KPIs related to your business’s financials.
Core Financial KPIs for Your Subscription Service
These are the fundamental KPIs you must understand as a business owner in subscription commerce. Because you’re building a business based upon recurring customers , you must understand how to plan around your customer base. Understanding your financial KPIs allows you to make more informed decisions about other aspects of your business, such as how much to spend on marketing, personnel, etc.
Churn or “attrition” is the rate at which you lose customers each month. This can often fluctuate and it depends on several factors, but it may be the best indicator of how well you curated your monthly box. Remember, churn must be less than growth in order for your business to expand.
For example, if you have 100 customers and lose 10 customers that month, your churn rate is 10%. To actually grow, you’ll need to sign up more than 10 customers in the next period. Otherwise, your churn rate will chip away at your subscriber base. For subscription businesses that ship physical products anything over 10%-20% churn could be an indicator that you need to improve your product or do a better job.
Once you pin down your churn rate, ask yourself some general questions about why it is the way it is. Being aware of what is affecting churn can better help you understand your customers and improve how you run your business:
- New customers: Did you acquire a large amount of new customers recently, and what was their source? Did they use a discount?
- Quality of Products: How happy was your procurement team about the box? Was the actual retail value of the items you procured higher or lower than the price your customers paid? (this can often create extra churn).
- Operations: Did anything go wrong? Did the shipment go out late?
You may occasionally hear someone refer to “retention”, retention is the opposite of churn. Retention is the number of customers that did NOT churn. So 90% retention means you churned 10%.
2. Customer Acquisition Cost (CAC)
Customer acquisition cost is the $ amount you spend acquiring a new customer. You’re often able to “target” these costs in marketing campaigns, but the best way to determine your overall CAC is to determine the entire spend on advertising, including press boxes/giveaways, and divide that by the number of new customers.
For example, if you spend a total of $500 advertising and acquire a total of 35 new customers, your CAC would = ~$14.28
Fundamentally, if your CAC is higher than the profit you’re receiving from your customer (that is, revenue – cost of goods) in the first month, then you’re either losing money if they immediately churn, or you’re forced to eat the cost in hopes they stick around month after month. However, if you have a high lifetime value (covered below), it may be justified to have a CAC that doesn’t net you any profit till 2-3 months down the road.
3. Average Revenue Per User (ARPU) and Monthly Recurring Revenue:
Average revenue per user is the average $ amount you’re collecting from customers. To determine it, divide total revenue (minus merchant processing fees) by active subscribers.
For example, if you have $5000 in revenue and 200 customers, your have an ARPU of $25.
This helps you project the total revenue you’ll have each month, by allowing you to multiply ARPU by the assumed # of subscribers you’ll have, a helpful feature in cash planning.
Similarly, understanding the relationship between your ARPU and recurring customer base is key for understanding your baseline monthly recurring revenue – that benchmark from which you must grow.
4. Lifetime Value (LTV):
Lifetime Value is the total $ amount attributed to the average customer throughout the lifespan of their membership. It can be thought of as: LTV = ARPU * Retention (the opposite of churn)
Lifetime value can be hard to pin down, especially with new businesses, as it can be hard to know how long your average customer will be sticking around (4 months? 7 months? 2 years?), but once you begin to plot out your monthly performance, you’ll be able to make generally safe assumptions.
For example, if you determine the average customer sticks around for at least 5 months, and your ARPU is $35, you can assume LTV of $175.
Lifetime value is particularly important because it can help you determine a sustainable CoCA and, if you have a high lifetime value, you can justify a higher spend on customer acquisition.
Pulling your KPIs into Cash Planning
Understanding your KPIs will only benefit your business if you’re precise and consistent at updating and modeling them in your financial planning. You should have, for example, the monthly count of your subscribers, ARPU, estimated daily growth, assumed recurring revenue, and CAC displayed along your daily model.
Make it a living, breathing doc, that you consistently update with proper bank balances and figures. By doing so, you’re able to accurate project and plan for your business – no guesswork required.