9 May 2019

Customer Acquisition vs Retention in Your Subscription-Based Business. Key Metrics to Understand, Track and Optimize

See all blog posts

Customer retention is paramount for companies operating in the subscription-based model. Having said that, one should learn how to measure it and make the most of the statistics at hand. What metrics to track? And how to convert them into actionable insights? Find out from this brief entry.

Retention metrics cover

Retention - key to the subscription model success

The subscription model is based on two core types of billing (and countless hybrid combinations based on the two):

  • “fixed fee” where the client is charged a predefined amount every week/month/year, regardless of the usage of the service,
  • “pay-as-you-go” where the amount varies depending on defined factors.

Adopting the subscription model is very much like running a user club: the goal is to satisfy the “club members” as their satisfaction determines if and for how long they stay with you, if they’ll pay the “membership fee” regularly, and if they’re going to purchase more services and “recruit new members”.

Stability and predictability of revenue resulting from effective customer retention are key competitive advantages of the subscription business model. Yet, it doesn’t mean that the actions taken during the first stages of the customer lifecycle are meaningless. On the contrary - acquiring new clients is a crucial task but it doesn’t mean that retention should be considerably lower on the priority list. All in all, these are the existing clients who pay subscription fees regularly.

Retention metrics to follow

In order to retain customers effectively, it is necessary to monitor the dynamics of processes that contribute to your overall business performance and financial condition. There are several retention metrics used in any subscription business. Besides the traditional ratios such as CR (Conversion Rate), CAC (Customer Acquisition Rate) or the whole range of variables connected with marketing effectiveness and functioning of particular sales channels, one needs to track:

  • MRR (Monthly Recurring Revenue) – the sum of all recurring revenues generated by subscription payments from your clients in a given month (excluding one-off fees). Monitoring MRR enables you to assess whether your subscription business is developing or not. It’s worth observing a range of variables accounting for MRR that illustrate and explain the dynamics: New MRR – the value of recurring revenue generated by new subscribers (acquired in a given month); Expansion MRR – recurring revenue generated by existing clients who have upgraded their pricing plan in the analysed period; Churned MRR – recurring revenue lost due to the termination of the customers’ subscriptions – be it voluntary or involuntary; Net MRR – the value of all recurring revenues generated in a given month less the value of all recurring revenue lost in this period.

  • Churn Rate – the percentage of subscribers that have stopped being subscribers in the analysed period. To calculate it, one has to divide the number of subscribers that have left in the given period by the sum of subscribers at the beginning of the period and new subscribers acquired in this time. A “healthy” Churn Rate varies depending on the industry and the company’s development stage. There are no rigid rules here – the only one is “the lower, the better”. It is key to identify two groups of customers: the ones that have left willingly (Voluntary Churn) and those that whose subscription got cancelled unwillingly (Involuntary Churn Rate) (e.g. forgot to secure funds on their credit card).

  • LTV (Lifetime Value) – the average estimated revenue generated by a unique subscriber during their lifetime. Sources suggest several ways of calculating it but in the subscription model, LTV is the Average Monthly Revenue divided by the Monthly Churn Rate.

  • ARPC (Average Revenue Per Customer) – the average revenue generated by a unique client during a given period of time; the total monthly revenue divided by the number of the subscribers that contributed to generating this revenue.

  • CAC (Customer Acquisition Cost) Payback Time – the time needed to regain the cost of acquiring a unique subscriber typically expressed in days or months. To calculate it, divide the Customer Acquisition Cost by the Monthly Recurring Revenue less the cost of your service. The longer the CAC Payback Time is, the more capital and the bigger “financial pillow” is needed at the start.

How can one use these indicators to retain clients effectively (e.g. reduce Churn Rate)? First of all, you need to confront those with the ratios characterizing your users and look for correlations. You can e.g. measure Expansion MRR in various client segments, compare New MRR month by month dividing it into sales channels or calculate LTV and MRR for particular subscription plans. It is also crucial and very helpful to monitor the LTV/CAC ratio as this metric says if your spendings on acquiring new clients are optimized. For instance, a 1:1 ratio means that increasing marketing spendings will be a waste of money: the acquired clients will not let you regain the cost of acquiring them and so will not start generating profits. A 3:1 to 4:1 ratio is considered optimal. A 5:1 and higher means that you probably don’t invest enough in acquiring new clients and you are not using your full growth potential. The optimal proportions will let you invest in retention actions as well as up-selling and cross-selling.

Several retention clues to remember

So here comes the practice. When running a subscription business, remember about several things:

  1. Early at the purchase stage, make sure your subscribers understand that they purchase a subscription service and will have to pay for it in a recurrent way. Unclear communication often leads to clients’ dissatisfaction, increasing the Churn Rate.
  2. Keep reducing the Involuntary Churn Rate until it reaches the absolute minimum. If your subscribers leave due to payment failures, apply solutions aimed at maximizing revenue collection. Start from facilitating the communication (remind your clients about the upcoming payment), choose the best moment to charge cards, and – if needed – automatically collect payments in more than one transaction over a certain period (it’s enabled by high-class subscription payment management systems).
  3. Keep monitoring your subscribers’ behavior as the way they use your service changes over time. Based on that, you can create both a high-quality supporting content and an additional up- and cross-selling offering. For example, if you sell software and observe a tendency to upgrade into a higher plan after 6 months, you can inform your customers about the upgrade in advance and offer a special price (up-selling) before they even start to hesitate between upgrading your product and finding a new provider. You can also suggest paid extras – useful for a given client segment – in the form of subscriptions or one-off purchases (cross-selling).
  4. Seek to maintain low Contraction Rate (the percentage of users switching to a lower subscription plan). It is possible – just like cross-selling – thanks to monitoring customers’ behavior and the way they use your product/service. The increase of the Contraction Rate is a good sign only when accompanied by reduced Churn Rate. Then, it shows effective, proactive retention actions. In any other case, it should be considered a warning signal saying that your subscribers are dissatisfied with some of the aspects of the “club” membership.

Retention monitoring for higher effectiveness

Monitoring the dynamics of retention - crucial in subscription-based businesses - should be conducted on a regular basis. Learning which metrics to use and how to measure them increases the effectiveness of retention actions significantly and, in a wider perspective, supports your strategic business planning. Thanks to that, your online business becomes more profitable.

Michał Jędraszak

Chief Executive Officer

Michał is an experienced executive who combines his deep technical background with outstanding business savviness. Prior to joining Straal, he had developed his managerial and analytical skills at a top tier consulting firm - The Boston Consulting Group - where he specialised in strategic advisory for the financial services sector.

At Straal, Michał is responsible for creating and operationalizing the company’s go-to-market strategy, coordination of key business development projects and building fruitful relationships with all stakeholders.

He holds a degree in Mechanical Engineering at Imperial College London.

You might also like...
Predicting Your Subscriber’s Behavior: How to Win and Retain Customers in Your Xaas Business
25 April 2019

Despite the uniqueness of every customer, the purchasing process they carry out doesn’t vary so much from one to another: they follow specific patterns. The marketing concept of customer lifecycle can help you improve your commercial effectiveness.

Read more
New Chargeback Thresholds – Don’t Panic. Get Ready.
15 April 2019

As of October 1st, 2019, Visa, the world’s largest card organisation, is updating its fraud and chargeback monitoring policy. Will it affect you? If you accept cards online – it certainly will. Should you be concerned? Not necessarily, if you have a well-thought risk management strategy, a slight refinement of it should get the job done. If, however, you do not yet have any fraud prevention mechanisms on board, you better hurry up in getting some.

Read more
Beyond Money. Customer Transaction Costs and How to Cut Them
28 March 2019

Selling is all about addressing your customers’ needs. Whether it’s offline or online, you seek to get to know your client segments and offer them what they’re looking for. However, it’s a human thing that we like when things go quickly and effortlessly. Fortunately, thanks to the Internet, we can shop the way we like: saving our time and effort. But is it enough to let your customers buy online? Can you still make their shopping experience less absorbing – and your brand more competitive as a bonus?

Read more
6 subscription business trends for 2019 you cannot afford to overlook
30 January 2019

2018 was without a doubt prosperous for subscription businesses. The model has matured, evolved and boldly developed in a number of new industries and markets (...) Here’s a list of 6 trends that – in my opinion – will have the greatest impact on companies operating in the subscription model; trends one cannot afford to overlook if they aim high on this promising yet ever more competitive market.

Read more
Anything-as-a-Service - the future with a stable, recurring fee attached
16 January 2019

Anything-as-a-Service (or XaaS) is a product distribution model, where companies shift from selling products to providing their value proposition as a service. Since XaaS can, quite literally, be anything, it isn’t hard to get lost in the jumble of buzzwords, jargon and concepts. This brief article will help you get an in-depth understanding of the new, service-based economy.

Read more
4 Tips to Win The 2018 Holiday Shopping Season. A No-Fluff Pocket Guide for Digital Goods and Subscription-model Merchants.
22 November 2018

Whilst Black Friday and Cyber Monday, or “Black Friday Weekend and Cyber Week” according to some experts do not mean as much as, say, 2-3 years ago, the pre-x-mas shopping spree is still among the key determinants of the thickness of your top line. Here’s how to - in the realm of intangible merchandise - make the most of the daddy of all holiday sales.

Read more
3 technical tips to growth hack your online business
15 October 2018

Simplicity of User Experience, efficient billing model and a well-thought risk management strategy. These are the keys to unlock your business potential on the ever more competitive market of digital services, as uncovered by e-commerce professionals at the very first edition of Warsaw Ecommerce Tech Sessions (WETS) – a new series of meetups powered by Straal and Business Link.

Read more
Blissful, bitten or shy? Your business in the face of fraud
17 July 2018

Have you fallen victim to fraud? If the answer is "yes", I assume you have learnt your lesson and already thoroughly inspected what went wrong. The “no” answer does not exist in the case of fraud. It’s only “not yet”. Be my guest and let me invite you to explore the dark side of ecommerce.

Read more
If it’s free, it’s for me - is the freemium strategy right for SaaS startups?
20 May 2018

Why is freemium so controversial? The word itself blends free with premium, which is fairly self-explanatory, but there’s more to it. Freemium never expires. It’s not a trial basis. It’s free forever, which probably amplifies the sense of risk.

Read more
Time is money: when one second costs $2.5 million
17 April 2018

Your customers won’t wait or engage in cumbersome processes to get your products and - if your competitors are able to provide the service faster – why would they? Straal presents the mathematics of instant e-commerce. Lean on these statistics to put your business in the fast lane!

Read more
Back into vogue: the essentials of the subscription experience
28 February 2018

In the times of the flourishing sharing economy, we’re renting, sharing and getting access to everything we need The line between products and services is becoming thinner and thinner, whereas possession is no longer guarantee for the customer satisfaction. What is in that case?

Read more
4 reasons to migrate to the subscription business model in 2018
8 February 2018

Do you remember the first time you sold your product or signed a contract for your service? I bet it felt good. Do you know what feels even better? Becoming a trusted provider of your services and products to your loyal customers and catering for their needs in the long-term.  That lasting feeling is what the subscription-based business model holds in store for success-hungry entrepreneurs across all sectors.

Read more
3 must-knows about the role of payment solutions in your development strategy
16 January 2018

The following article is meant to help you understand how payment solutions chosen by your company influence your business performance, and thus how important it is to decide on such that will not only meet your current challenges, but also support your development strategy in the long term and smoothly scale your business.

Read more
5 Things You Should Know about the Payment Ecosystem
30 November 2017

Fintech insiders oftentimes erroneously assume that consumers, let alone merchants, know much more about digital payments than they actually do. This might lead to disturbing misunderstandings, make companies miss business opportunities, consumers get a headache and vendors fritter away their marketing budgets.

Read more
Show more releases