According to subscription metrics guru Joel York, the simplest way to calculate CLV is by dividing your recurring revenue by your churn rate. KPI: Customer lifetime value CLV = Recurring revenue Churn rate $ =
The Subscriber’s Journey The following
is a description of the main events that occur as a visitor discovers your product, becomes a paying customer, and transforms into a loyal subscriber. We’ll take a look at each of these events and then we’ll discuss KPIs like churn rate, customer acquisition cost (CAC), recurring revenue and customer lifetime value (CLV). Signing up free users Billing subscribers for the first time Renewals
MILESTONE: Signing up free users
It is incredibly important to sign up free users because they constitute the majority of the customer base that becomes paying subscribers.
MILESTONE: Billing subscribers for the
first time Once a free trial ends or a user decides to upgrade from the freemium product to a paid version, the user must submit payment. Some companies collect payment information before letting visitors sign up for the trial or freemium product, but most wait until the initial billing event. It must be absolutely clear from the start that users are signing up for recurring payments. Don’t be ambiguous. It only leads to a tarnished reputation down the line—not to mention increased costs and lost revenue due to spiking customer contacts, refund requests and chargebacks.
MILESTONE: Renewals -In subscription commerce,
you are most concerned about gaining a predictble, recurring revenue stream. Get customers in now in order and upsell them later. This gives you less revenue upfront, but greater potential revenue downstream.
Up until now, we’ve focused
on the important milestones of the subscriber lifecycle. Now, we’re going to talk about the KPIs associated with these events.
The only way for your
subscription business to thrive is by growing renewals. To see how well you are thriving, you must monitor the following KPIs: Customer acquisition cost Churn rate Recurring Revenue Customer Lifetime Value
KPI: Customer acquisition cost Consider
your answers to the following questions, as they all factor into an important subscription KPI: customer acquisition cost (CAC). How much do your email marketing efforts cost? How much do your search engine marketing (SEM) efforts cost? How much does your ecommerce solution cost? What are your payment terms with affiliates? Are they paid per signup or per transaction, and does that commission continue for each renewal? =
CAC = Total cost of
acquiring subscribers Total amount of new subscribers To calculate CAC, total all of your costs for acquiring customers as a single number. Next, divide that total by the number of new subscribers gained from these marketing efforts. If each month your company acquires 10,000 customers and spends $350,000 on all those acquisition efforts (including email marketing, SEM, ecommerce, etc.), your monthly CAC is roughly $35 per customer. There are a number of other factors that go into calculating CAC, like employee salaries, infrastructure costs, etc. The point to remember is that acquiring customers takes time, money and human resources. Customer acquired each month 10,000 Marketing costs $350,000.00 CAC per customer $35.00
In its simplest form, the
churn rate is calculated by establishing how many customers canceled in a given time period. KPI: Churn rate Churn rate % = x 100 Number of canceled subscriptions (Time period x Number of active subscriptions)
If you had 10,000 active
subscribers at the beginning of a month, and by the end of the month you had 7,500 active subscribers, your monthly churn rate would be 25 percent. Monthly Churn Rate % x 100 2,500 ( 1 x 10,000 ) = Interval Amount of active subscribers 10,000 Amount of canceled subscribers Churn Rate 25% KPI: Churn rate 1 6,000
Now, imagine a scenario where
you’re effectively increasing the number of subscribers who sign up each month and decreasing the number of subscribers who cancel each month.
In this scenario, you acquired
10,000 subscribers in the first month; 11,000 in the second; and 12,000 in the third. Meanwhile, 2,500 subscribers canceled that first month; 2,000 in the second; and 1,500 in the third. Your total of acquired subscribers is 33,000 and your total canceled subscribers is 6,000. Your monthly churn rate is now at 6 percent. Monthly Churn Rate % x 100 6,000 ( 3 x 33,000 ) = Interval Total32 Amount of active subscribers 33,00012,00011,000 Amount of canceled subscribers 6,0001,5002,000 Churn Rate 6%4%9% KPI: Churn rate
But churn does not occur
in a vacuum. To calculate the true impact of your churn rate, forecast how many users you’ll need to acquire to reach your revenue goals. For example, let’s say on January, 1, 2016, you have 100,000 subscribers. To reach your revenue goals, you need 200,000 active subscribers by January 1, 2017. For the next twelve months, you need an average of approximately 8,400 new users every month. KPI: Churn rate
What happens to your forecasting
if you have an average monthly churn rate of 4 percent? To reach your goal, you’ll actually have to acquire an average of 11,834 subscribers every month. KPI: Churn rate
Recurring revenue is fairly simple
to figure out. Take the amount of revenue generated by a subscriber and divide that number by the amount of billing intervals. KPI: Recurring revenue + + + ... Recurring revenue = Monthly recurring revenue Annual recurring revenue Revenue generated Revenue generated Revenue generated In the case of a single subscription that costs $9.99 per month, the monthly recurring revenue is $9.99 per subscriber, while the annual recurring revenue is $119.88. Billing interval Billing interval Billing interval = =OR
What happens when you increase
the number of subscribers each month? Monthly price Total $9.99 Monthly intervals Revenue each monthly interval Monthly Recurring Revenue 1 quarter $ 329,670 $ 329,670 3 $ 119,880 $ 109,890 2 $ 109,890 $ 104,895 1 $ 99,900 $ 99,900 Number of subscribers Revenue from active subscriptions 33,000 $ 329,670 12,000 $ 329,670 11,000 $ 209,790 10,000 $ 99,900 Returning to our churn rate scenario, your company acquires 10,000 subscribers in the first month, 11,000 in the second, and 12,000 in the third. At $9.99 per subscriber, your company is generating $329,670.00 in quarterly recurring revenue.
There are two methods for
increasing recurring revenue. The first is to acquire more subscribers, and the second is to increase the value of each subscription by persuading subscribers to upgrade to a more expensive plan.
According to subscription metrics guru
Joel York, the simplest way to calculate CLV is by dividing your recurring revenue by your churn rate. KPI: Customer lifetime value CLV = Recurring revenue Churn rate $ =
Reviewing our previous scenario: Your
company acquires 33,000 subscribers in three months, but loses 6,000 subscribers to churn over that time period. Each subscriber is paying $9.99 each month. At the end of the three months, your company has generated $329,670 in recurring revenue from all active subscriptions with a 6 percent churn rate. Your CLV, therefore, would be $5,439,555.00, or $164.84 per customer. CLV = $329,670 6% Monthly price $9.99 Monthly intervals Monthly Recurring Revenue CLV 1 quarter $ 329,670 $ 5,439,555 3 $ 109,890 $ 2,877,120 2 $ 104,895 $ 1,208,790 1 $ 99,900 $ 399,600 Number of subscribers Monthly churn rate CLV per customer 33,000 6% $ 164.84 12,000 4% $ 239.76 11,000 9% $ 109.89 10,000 25% $ 39.96
How upgrades and downgrades affect
recurring revenue and CLV Consider the scenario where the subscription is for a number of licenses for a given product or service. It is common for downgrades to occur, for example, if an employee leaves a company. The company now needs fewer licenses. This affects CLV negatively.
Other important scenarios that negatively
affect CLV include cancellations, refunds and chargebacks. These will all raise your churn rates and decrease recurring revenue rates — both of which have enormous impact on your CLV. Make sure you have a well thought out plan for reengaging these lapsed subscribers in order to lessen the impact on CLV. Make sure you have a well thought out plan for reengaging these lapsed subscribers in order to lessen the impact on CLV. KPI: Customer lifetime value $ =
Conclusion To find one real
friend in a lifetime is good fortune; to keep him is a blessing.” - Baltasar Gracian All too often, you think of customers as commodities—interchangeable goods who will always be available to add to your business’s bottom line. The fact of the matter is that your business is a commodity for your subscribers. If your business lives and dies by subscriptions, you need to understand the map of your subscriber’s journey and its relevant KPIs. Make sure that your ecommerce arsenal has capabilities to support subscribers at each stage of their journey and to accurately report subscription specific KPIs. This will ultimately reduce headaches and provide business stability for the future. “
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