Key Metrics from Subscription Billing

December 17, 2014 Pam McBride

subscription billing

The shift to the Subscription Era has disrupted traditional business models. Aside from new delivery methods and pricing structures, SaaS companies are also expecting their technology investments to provide metrics that help them manage the customer lifecycle – from conversion through to retention, renewals and growth.

And some of the key metrics required for SaaS success originate or can be extrapolated from your subscription billing system. So to gain a better understanding of the need for a recurring billing system in general, and a better understanding of the most important measures of any subscription and SaaS business, Amity spoke to Sravan Kumar of ChargeBee. Strap yourself in, because we learned a lot!

Amity: First of all, what is recurring billing (service) and why, as a subscription business or SaaS business do I need it?

CB: In a subscription based business, the merchant buyer relationship is forged every month. So, a simple billing mistake could lead to distrust and affect customer Return of Interest. A recurring billing system enhances billing accuracy and that leads to faster receivables and also increases customer satisfaction. More importantly, with a recurring billing service you get better tracking and forecasting to retain current customers and also attract new ones. Ultimately, a recurring billing service will streamline billing processes and lets teams focus on more important aspects.

Amity: Ideally, what should I expect from a recurring billing service for my SaaS business?

CB: There’s a varying degree of difference between billing patterns used by SaaS businesses. And over time, most billing strategies are revised, as businesses traverse the growth curve. An ideal recurring billing platform should be flexible enough to accommodate all billing use cases. Apart from this, a recurring billing service should be compliant with PCI DSS standards to handle credit cards and also provide credit data portability so that you can retain your customers billing information should you choose to switch gateways. (Lastly, don’t underestimate the importance of customer support as you would want a service that will be able to work with you to fix things when they go wrong.) Ideally a recurring billing service should not just support, but enhance, your business strategies.

Amity: Is there a difference between a subscription business and a SaaS business?

CB: Yes of course! Though the recent subscription billing trend was triggered off by SaaS businesses, today different sectors are experimenting and adapting “a subscription based business model.” As in a monthly payment method model the fee is small and with no contracts in place this becomes less of a purchasing block in the mindset of customers. So now you can witness ecommerce businesses and services agencies all adapting to a subscription based business model for this reason. The best examples are Birchbox, Netflix and Soylent.

Amity: What are the most important metrics to start analyzing for my subscription or SaaS business?

CB: For SaaS businesses there are a few core metrics that need your absolute attention and the priority amongst these metrics shift as you grow. One key metric you should always be focusing on is MRR (Monthly Recurring Revenue), which is normalized monthly revenue, based on all recurring items of a subscription. The health of a SaaS business heavily depends on recurring revenue. It can take months to regain the cost of acquiring a customer and the real profits come from increasing that subscription revenue. MRR helps you get a clear picture of your revenue stream and spot which factors are affecting you monthly.

Another important metric to track is Churn. Churn is the percentage of your user base who discontinue your service over a period of time. If you can control your churn rate then you can focus on acquisition but if your churn rate goes out of control, you will be chasing customers who are likely to abandon your service and this would affect your growth curve soon.

Amity: As my SaaS business grows, what additional metrics should I be looking for?

CB: As your SaaS business grows up you might experiment with multiple channels for customer acquisition. Now understanding the customer LTV or Life Time Value becomes critical to adjusting your acquisition spend. In simple terms, this is the revenue expected from a customer over the complete course of subscription. When you factor in acquisition spend and product costs, it might be a while before you turn a profit out of your customer. To make sure customers stay long enough to keep your business healthy, we use lifetime value.

And as you experiment with newer acquisition channels, CAC or the Customer Acquisition Cost can keep you in check. Simply put, the CAC refers to how much it costs to acquire a customer. The CAC will not only help you measure new channels for growth, but also how far to push on you main channels.

Amity: We do weekly reporting – is there a standard set of metrics to present to the executive team?

CB: Ideally KPI reports or Key Performance Indicators should have these:

  1. Visitors & Signups
  2. Signups & Paid Customers
  3. New MRR or New Recurring Revenue through new activations
  4. Total MRR or the consolidated Monthly Recurring Revenue
  5. Churn MRR or Monthly Recurring Revenue Lost due to Churn
  6. Customer Retention Rate
  7. Customer Churn Rate
  8. LTV or Life Time Value
  9. And ARPU or Average Revenue per User

Here’s a sample report we provide to our customers.

Amity: What is the future of recurring billing and how will it impact the subscription business model?

CB: The SaaS business model is being replicated across various verticals. The subscription model is enticing for customers as they are paying less and making fewer purchasing decisions. The rocketing growth of subscription businesses shows that the customers’ view of subscriptions is positive and many businesses are also making this model work and growing profits and acquisition. Therefore, the future looks bright for the subscription business model and will continue to do so.

SaaS businesses can be optimized in many ways – it begins by identifying what to measure, understanding the relationship to your goals and establishing the right benchmarks to succeed. Want more information on recurring billing or require a recurring billing service for your SaaS business? Visit ChargeBee today!

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