E-commerce subscription models are businesses where people access a solution by paying for it periodically. Typically, users pay on a monthly basis, and for simplicity’s sake, we’ll use this time frame in this post.
Hosting platforms, software as a service tools and blogs are examples of subscription platforms where the content is digital. But you also have brands like the Dollar Shave Club, Stitch Fix and meal delivery services where you subscribe for regular physical goods to arrive at your doorstep.
This type of business model makes the best sense under these conditions:
• Your product is something that customers need on a regular basis.
• You provide a product or solution that needs updates to keep up with industry changes.
• You’re looking to build a long-term source of income.
The brands that I’ve co-founded are based on this type of business model. It helps us provide consistently high-quality products and services to our audience. It also allows us to add new features and make changes as the core software on which our products are based keeps evolving.
Managing a subscription-based e-commerce business requires constant monitoring. This is possible when you have the right metrics in place. Let’s look at some key metrics that matter and why.
Monthly recurring revenue
When you’re making projections based on the expectation that you’ll have a reliable source of income in the future, a significant dip in your monthly revenue can displace your planning.
Even if such major shifts are unlikely, being aware of your monthly recurring revenue is critical information that makes you familiar with the pulse of your business.
It’s also the foundation on which other important metrics are calculated. It’s fairly simple to calculate, and you can do that by multiplying your average revenue per account with your total number of customers.
ARPA is helpful when you offer different tiers of subscriptions, such as a basic plan, a small business plan and an enterprise-level offering. You’ll get this figure by calculating the average of how much all your customers are paying and dividing this by your total customers that month.
Customer lifetime value
Calculating your customer lifetime value is important because it will tell you how much you should spend to acquire a customer. You find this out by calculating the total amount you earn from a customer throughout the course of their life.
This metric is valuable because it helps you project the lifetime of your business and how profitable you’re likely to be. When you understand the value of your customer over a lifetime and how it will impact your business, especially in terms of longevity and profitability, you’ll know how far to go in terms of your marketing activities.
For example, a luxury food subscription business is likely to see a higher income over a customer’s lifetime, so it makes sense to invest in building a strong brand identity to help customers see the value of the business.
Customer acquisition costs
You’ll have a profitable subscription business when your customer acquisition cost is lower than your customer lifetime value.
You calculate your customer acquisition costs by dividing the costs associated with getting a new customer by the customers you’ve gained in the time you spent that amount.
This metric helps you get a clearer picture of how well your marketing is working and whether you’re going to be profitable. Together with the customer lifetime value, you’ll even learn which customers to focus your efforts on.
Your churn rate is the rate at which customers don’t renew their membership. You calculate this by dividing the customers who have churned during the month by the number of subscribers you had at the beginning of the month. Convert this into a percentage, and you have your churn rate.
Although it seems simple enough, there are several factors to consider depending on your industry and your unique business situation. Let's look at a few factors that can impact how accurate your churn rate is:
• Seasonal and holiday changes.
• The time frame you chose. Daily, monthly, weekly and other periods will give you different results.
• The tiers of subscriptions you offer (e.g., your basic subscription versus the enterprise level).
• Whether your customers churned because they deliberately stopped using your services or whether there was a payment failure (i.e., an involuntary churn).
Your churn rate is one of the most important metrics to keep an eye on. With analytics and by asking customers for feedback, you’ll be able to fine-tune your marketing and solutions for higher retention. Reducing your churn is essential if you want to keep customer acquisition costs down and stay profitable.
A subscription e-commerce model is a virtually automatic source of revenue. But it does need you to keep track of its health by tracking the right metrics. We’ve looked at some important KPIs for you to follow.
What matters is that you tweak how you calculate these things based on your business needs. Keep experimenting with your data, and carry out tests to see which metrics help and how you can leverage them. By analyzing such information and acting on insights, you’ll help your business grow.