Only a few subscription business KPIs for small businesses really matter!  Too often, service companies monitor secondary stats too closely while not prioritizing the metrics that create growth.  Here, we share the critical KPIs for subscription businesses and ongoing services that give the most insight.

If you own, or run a subscription business that provides a service, metrics like your number of sign-ups, customer value, and your growth and profit goals are in full view.  These are major subscription business KPIs for small businesses that impact your day to day and that you feel in your bottom line.

A KPI, or key performance indicator, is a data point your company is watching to track their effectiveness and / or performance.

For leaders, it is easy to get into the habit of making business decisions based on the KPIs that seem like they carry the most weight, or are complicated to figure.  They are the metrics that pull in big trends and examine them as an average.  They are the metrics with three and four-part formulas. And yet, a complicated formula doesn’t necessarily mean it is more useful. There is a much better path forward.

If your data and KPIs are analyzed and prioritized in a meaningful way, you will gain valuable knowledge that can lead to growth and optimization, rather than spinning wheels and fighting the – often – uphill battle of subscription sales and ongoing services.

In other words, subscription business owners can miss the mark with using their KPIs effectively if they are not mindful and know what matters to their growth.  There can be so much data that analysis becomes overwhelming too.  The good news is that the KPIs we believe are most important to service businesses are quite easy to follow and simple.

The 3 most important Service Subscription Business KPIs for small business owners to monitor:

• Incoming sign ups / clients
• Outgoing customers / clients
• Monthly Recurring Revenue – how much revenue one customer yields per month

These three metrics give leaders fast insights into how their business is performing and early warning signs of down trends. With this information, a subscription business can chart a path forward, using data as a guide.

Churn Rate in Subscription Businesses

Together, the first two metrics, or KPIs, make up your subscription business’s churn rate – we define this as the net number of positive or negative gains your business is making per month with your subscriber base.  So incoming minus outgoing, and churn is the number, or percentage you are left with.

In a previous post, we discuss the importance of monitoring your churn rate on a regular and ongoing basis to spot “leaks”, or gradual attrition that occurs.  Reducing your churn rate should remain a high priority for subscription business models, especially, and there are a number of ways to improve this figure.

Minimizing the number of outgoing customers improves the churn rate and is a good first step. This makes sense as well. Stopping exits ensures you have a foundation of subscribers that can be built upon to grow further.  Otherwise, you will keep spinning the wheels – simply replacing the client you just lost with the one you just gained.

You can also work on new ways to add students to the incoming group, but this is second to keeping those you have already acquired. It is much easier to continue working with an established client than it is to bring on a new one. An easy way to optimize your incoming subscriber number is to use this insight to refine your advertising performance and achieving the highest number of contacts for your budget. Your incoming student number will tell you if you are on the right track.

To ensure your churn rate is trending upwards towards growth, take every effort to make sure your net number of incoming subscribers is greater than the outgoing subscribers within a given time-frame.  Keep this time frame you are measuring short for the best results – like checking the stats every week, or every 2 weeks.  The smaller the time-frame, the quicker you can react to prevent a small issue from becoming a larger one. 

PRO TIP:  use different sets of date-ranges to compare historical trends in your company’s churn rate.  These comparisons will help you gain the most insight in seasonality, as well as atypical breaks in your normally expected growth trends.  For example, track sign ups and exits by the week, month, MoM (month-over-month), and YoY (year-over-year) as comparisons.  These insights allow you to make varied predictions based on these two, foundational metrics.

Monthly Recurring Revenue (MRR) for Subscription Businesses

…the bottom-line financial KPI and critical metric to track on a monthly basis.

MRR is your subscription business’s “monthly recurring revenue”, or how many subscribers you have and the amount of income they generate in a month. 

As an owner, this figure should be tracked as part of calculating any profit shares, or monthly earnings for primaries once expenses are deducted. However, knowing the amount generated per student before expenses (revenue) is important too. This metric can be used to figure what your subscription business is expected to generate in the upcoming months, as well as identify where expenses may be hurting the overall profit spread.

With a service you personally provide, or that is automated, the amount you make before expenses is your revenue.  But for a service business that has a staff implementing the ongoing work, the MRR will be the amount paid from subscribers minus the amount paid to the professional implementing the service over the same time frame.

For the purposes of the MRR calculation, these service businesses with professional teams making a set percentage of the total fee billed to the client should only count their retained share of the subscription fee as revenue for MRR. It is NOT as helpful to go by the amount originally billed to the subscriber, as a set portion has to be taken off the top for the staff.

MRR is a VERY important metric, because trending upward is the desired goal, and a company needs to know how much revenue they can anticipate per month as steady, recurring income.  In running a subscription business, you must also plan any future expansions, investments, and your entire business budget based on this figure. 

Staying mindful of your actual MRR vs. projected MRR is key, and both are valuable.  But even more-so valuable is any gap that comes up between your estimated and real MRR for the month.  This gap tells you where things did not go to plan in your business that month.  It also gives you areas of opportunity to examine snd improve your product, or operations.

Of course, the key is taking action with this metric, as well as your churn rate.  But having the information on hand – just as a conscious business decision and level of oversight – will lead to very positive changes in any downward trends you are experiencing.

Though we have a slim list of most-important KPIs for subscription service businesses, there are a number of metrics that are commonly tracked and also valuable.  However, their immediate use in creating growth is secondary to your business’s churn rate and MRR.

Retention Rate, ARR, and LTV explained – secondary KPIs for subscription services

Whenever we are abbreviating business terms, the information being shared can feel more intimidating to those just getting into the world of entrepreneurship, or you may be unfamiliar with the industry-lingo.  Rest assured, it is a universal feeling and will pass the more you engage with data and analysis of your business. 

Secondary to monitoring your business’s churn rate and MRR are your retention rate, Annualized Recurring Revenue (ARR), and the Lifetime Value of a subscriber (LTV).

Subscription Retention Rate

The retention rate for your subscribers is an important metric, but there is a reason it is not on our top-tier list of KPIs for recurring revenue models to monitor.  Retention defines the length of time your clients, or customers, keep their subscription with your company.  Improving your retention absolutely leads to growth.

BUT, this is where we can fall short on analysis and context as leaders. Retention is typically monitored over long periods of time – months and years.  As a subscription business owner, you need a faster warning system for any retention-level issues, and you get that benefit from watching your churn rate.  The fluctuations and up, or down trends with the net number of subscribers over short time frames will be telling and a way to improve this retention rate on the front lines. Plus, internal trends that lead to retention, or attrition, can change course frequently. Retention is measuring an average, but not the real-time challenges producing that average.

THE COMMON MISTAKE:  Too often, owners use their retention rates to assess the health of their business, or make predictions about earnings, without remembering retention is a big-picture item.  In my own experience running a subscription business that provided music lessons as a service, retention was actually a better tool to measure the effectiveness of our teaching staff providing the service, rather than providing customer, or budgeting insights. The trends for individual providers were more personalized and stable as helpful analysis, rather than data that applied to the entire school as a whole.

ARR – Annual Recurring Revenue for Subscriptions

Annual Recurring Revenue (ARR) is another metric that is very high-level, but quite valuable when monitoring large organizational changes and their impact.  ARR is just how much your company earned in a year. It is the annual counterpart to MRR, or monthly recurring revenue (see above).

The issue with using ARR as a front-line KPI, or a data point for generating growth is similar to the issue with using retention rates for the same type of projections.  They have such long timelines associated that only larger trends can be spotted with his type of data.  While actionable in creating an annual plan for your business, or a multi-year plan, both data sets will not help with immediate, “on the ground” growth for a subscription business trying to trend upward. 

However, paired together, subscriber retention rates and ARR can paint a different picture over an entire year and produce directional insights for a company, as well as point to seasonal trends when enough history has accumulated.

Subscriber LTV – Lifetime Value

Lastly, Lifetime Value, or the “LTV” of a subscriber is a figure you hear quoted all the time by business owners.  “One subscriber makes me $587 a year!”  Obviously, an important figure to know, but how do you find it and what do you do with it once realized?

First, LTV is just the amount of revenue a business expects one customer to yield when they sign up.  It is an average and why it is their “lifetime value”. For single product sales, the number of times a customer buys the same product again and again would contribute to their LTV, but it is a different formula for subscriptions.

You can find LTV for a subscriber of your service business quickly by taking the amount of revenue you make in a month from one customer, then multiplying it by your company’s average retention rate.

For example:  if one subscriber makes a business $150 per month, and the average person stays enrolled for 10 months, a customer’s LTV is $1,500.

This is a great insight for budget planning and determining how much to allocate to advertising, forecasting the future, subscription pricing, as well as planning new business initiatives and service offerings.  LTV is number you want to increase over time, as it points to your retention and revenue all in one. 

However, just like ARR and the Retention rate itself, this is a far-out stat that is measuring (literally) lifetime effectiveness.  It can help tremendously with positioning a subscription company for growth in the future, or as a “how are we doing?” barometer.  The limitation is in the ability to give actionable changes to an owner or team that are relevant to immediate issues. 

Churn rate and MRR, on the other hand, do give those insights, which is why they are top tier stats to monitor closely – whereas retention, ARR, and LTV are on a second tier of importance and do not need the same type of oversight consistently.

What subscription business KPIs are best for small service businesses?  – In Conclusion

What subscription business KPIs for small business are best for providers of services? – In Conclusion

Data is a wonderful thing – no matter how broad, or narrow it is.  Every KPI has its purpose, and it’s just numbers and metrics at the end of the day.  It’s the analysis and insight our data gives us that matters most.  There are specific KPIs that are more important for small businesses to watch than established corporations, as trends are dynamic early on and can change quickly. 

In the realm of small service businesses with subscription models, monitoring incoming and outgoing clientele in short time-increments (like daily, weekly, or bi-weekly time-frames) and watching your MRR, or monthly recurring revenue, will give you the most insight with quick actions you can take towards growth.

Others like ARR, Retention Rate, and LTV matter too, but for different, higher-level purposes and projections.

Are you struggling to analyze your company’s performance, or create a trend of growth for your subscription business?  At AstroCat Consulting, we solve a wide range of small business challenges and specialize in recurring revenue business models for services.  Reach us today to share more about your company’s needs and how we can help!

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