The Metrics that Drive Growth for Subscription Startups
MELINDA ELMBORG • NOV 25, 2017
Are you running a SaaS startup? Maybe you run a consumer subscription service. Whatever the case may be, this guide is for you! You will learn about a subscription startup’s ultimate metrics, and see how this type of startup up is broken down piece by piece to find the metrics that drive the company’s growth. This type of breakdown is called a Metrics Tree.
This article follows up on How to Start Working with Metrics in 5 Steps. If you haven’t read it, I recommend you do that before reading further.
To achieve your goal of fast growth, you need to realize that a business is full of levers to push and pull. Identifying these connections is crucial, and will help you get moving in the right direction. From there, you’ll be able to understand and recognize how different metrics influence each other.
The example dashboard will help your startup team easily understand how your business is performing. And when you understand your users and business, you will be better at making the right decisions.
Thanks to this monthly view, you can connect your actions to the performance of your startup. When you look over your numbers, think about what has happened during the past month. Did you launch a new feature? Tried out a new marketing channel? You should be able to see the difference in these metrics.
Here is a screenshot of an example Subscription Metrics Tree. You can download the template to use for your own business here!
This is the monthly revenue. Since you run a subscription business, it is recurring. We put it at the top because, frankly, it tends to be the most important growth goal for startups. Revenue means business!
To the left, you see the actual amount of revenue, and to the right, the change from the previous month. For this business, you can see that this month, they’ve had 13% revenue growth. Nice! The average subscription business 1 or 2 years after launch is expected to achieve 15–20 % monthly growth in MRR.
But where did this increase come from? What actions did we take during the month to achieve this growth? Let’s look at the rest of our metrics to understand this.
ARPU — Average Revenue per User
This metric shows you how much you earn per user. For simplicity’s sake, in this example, there is a fixed price per user, a bit like you have for Spotify or Netflix. That is why it hasn’t changed since last month. That said, it can change from month to month because of currency fluctuations or discounts that you offer.
If you have multiple prices, you would see how the average changes, and underneath you would split your ARPU to what share of users are on each type of plan.
If you are instead offering a B2B SaaS, it would be better to call this category ARPA (Average Revenue per Account). In some cases, you might have a customer with multiple licenses, so if your customer adds licenses you’ll be able to see how the ARPA increases.
Here, you can see how many customers you have and how that number has changed since last month.
You’ll notice that Customers x ARPU = MRR. This means that ultimately these are the only two levers you can pull to increase your MRR. Since this startup increased its number of customers by 10 %, and ARPU by 2%, we achieved a growth of 13 %.
This category shows the number of new customers who signed up for the subscription. This is the most important metric for your marketing team. To the left, you see the total number of new subscribers, in the middle the share of the total number, and to the right the growth since last month.
This number only increased by 7 %, so how did we reach total customer growth of 10 %? Let’s not forget about our existing customers!
This is the number of customers who were subscribed the previous month and stayed (renewed their subscription).
From last month, we have another 11 000 customers who stayed, which is 11 % more than last month. Hooray!
That’s a serious uptick in retention, so what did we do to achieve this? Maybe we added a new feature which entices customers to stay on their subscription?
This metric, together with your churn have the heaviest impact on success 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 your retention rate will drop.
Your retention rate also reveals how well your customer acquisition investments will pay off. You might be able to convince many new customers to join, but if they leave quickly, your return will still below.
This is the number of customers from last month that decided to not renew their subscription. In this example, this represents 11 % of the customer base they had last month. There is, therefore, an 11 % chance that any customer from last month cancelled their subscription.
As you can see, the churn rate shows the opposite of the retention rate. Of course, it is equally important to decrease the churn rate as it is to increase the retention rate. Usually, for a SaaS business, a churn rate lower than 5 % is considered good. And while the startup in the example has a churn rate higher than 5%, they’ve done an excellent job of decreasing their churn rate by 33 %!
This is an estimation of how long customers will stay subscribed based on your churn rate. In this case, there is an 11% risk of any customer to churn per month. To calculate the lifetime we take the 1/churn rate. For this startup, the average subscriber will stay for about 10 months. Since this app has managed to drastically decrease their churn, we can see the difference in Life Time increasing by 66 % from 6 to 10 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. Since trial users become paying customers after their 1-month trial, these two metrics show the results from the month before.
For the trials of this startup, we see that 4 085 potential customers signed up for the trial. Afterwards, 2 679 finally decided to join the service as a paying customer.
In absolute numbers, it looks great since the number of trials increased by 31 %. But watch out! This is a typical case of vanity metrics. The conversion rate was 66 % but it decreased by 18 %. Even though at first sight this month’s numbers looked good, the app was less efficient than previously at converting trial users to paying customers.
Switching our focus from absolute numbers to conversion rates is how we go from vanity metrics to sanity metrics. It’s conversion rates, not raw numbers, that tell us if we have improved in efficiency or not.
Site Visitors and Conversion Rate
This startup had 103 643 visitors on their site, and since 4 085 of them converted to trials, we have a conversion rate of 3.9 %. Again, at first glance, it seems like we’ve obtained very encouraging growth. However, we see that the conversion rate actually decreased. It means that our site is performing worse than before.
This startup spent 33 430 € on marketing, which is an increase of 48%. It is very important to also include any staff costs if you have anyone working on marketing or sales. It seems like the business has tried to speed up their growth. They were not so successful, though, since the final increase in new customers was only 10%.
LTV — Lifetime Value
In the top left corner of the dashboard, we see our LTV. That is the calculated total revenue that each customer will spend during their lifetime as a customer to the company. Since the Life Time of our customers is 10 months and they pay 5.1 euros per month our LTV is 51 euros. Maths!
CAC — Customer Acquisition Cost
Below that, we see our marketing cost per new customer. It’s calculated by taking the total marketing spend and dividing it by the number of new customers.
This is a very important metric because it provides insight into the startup’s profitability and future potential. By dividing our Lifetime Value by our Customer Acquisition Cost, we get a pretty solid idea of the profitability level.
The recommended range for the ratio is 3–4, but higher is better. Having a satisfying LTV-CAC ratio means that we get back the money we spend on acquiring a customer. Moreover, we can organically finance acquiring more customers. If your LTV-CAC ratio is 4, it means that each new customer pays back the marketing cost and helps you finance the acquisition of 3 more customers. That is the road to exponential growth!
As this metric reveals both the efficiency of the marketing/sales funnel and the value customers find in your service, it’s a great number to be able to show off to investors.
With this dashboard, we can see exactly how our actions affected the growth of the company. The growth we achieved came mostly from acquiring new customers, but we didn’t get much bang for our buck. This company should probably reconsider the increase in marketing spend. It seems like they should get better at targeting people who were actually interested in paying for their service. Whatever new feature they launched was a great success since it increased the retention rate. They should explore how they can further develop similar features.
Every startup is unique, and you will definitely have to tailor this template to fit your specific startup. What if you don’t have trials, but you are a B2B business and you do sales calls with leads? You could then just replace the number of trials by leads. If your startup is not subscription-based, you can check out the Metrics Tree article for Online Marketplaces instead!
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About the Author:
Melinda Elmborg was a Venture Capital Investor at the French VC firm Daphni. To help founders build, grow and raise capital to their startups, she switched careers to become a startup coach. In 2018, she started Startup Action.
Based on her learnings, she has developed The Startup Action Framework that guides startups from launch to exponential growth.
So far, over 400 founders have already joined one of her workshops and thousands of founders have taken advantage of her templates and guides to succeed with their startup.