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TLDR: For a long time, eCommerce businesses (subscription or not) could dwell on revenue figures to understand growth. That's, of course, before COVID came and changed the rules of the game. Companies had no choice but to adapt, and performance measurement took center stage, providing direction for brands to build the data to understand customer nuances better. This guide takes you through the entire gamut of subscription eCommerce metrics., how you can leverage them, and understand their impact on your business.
Like most other discretionary goods retailers, North American arts and crafts chain - Michaels didn't have an enthusiastic start to the pandemic. With almost all of its 1,200 stores in the U.S. and Canada shut, the company was forced back to its drawing board, trying to stitch the digital gaps now laid bare through an unprecedented global conundrum. It was apparent; that they had to make a swift shift to eCommerce.
But there was something peculiar about digital retail. A pandemic-induced eCommerce exodus began to look more and more like Icarus' wings. Lucrative, yet unrefined. Sure, being present online meant your customers had access to your product. But it did not influence the need and high-touch physical stores or solve distribution disruptions (the PS5 kind).
Michaels realized far better than most, however, that the actual value of eCommerce is not just in its proximity to users but in the repository of data that accurately captures your business. And hence, they promptly resorted to metric measurement and optimization to guide business decisions.
For example - identifying customer journeys and evaluating them against acquisition costs led them to build and launch Boredom Busters - their DIY projects page that gave hobbyists - a new reason to remain occupied at home, and Michaels - a fresh avenue to monetize customers.
“We pulled this page together in a matter of days, and almost overnight, we saw a 350 percent increase with engagement.”
Steve Woodward, Senior Director of Digital Experience, Michaels Stores
From a tepid Q1 '20, Michaels saw a net sales increase of 11.1% to $1.1 billion in the next quarter, grew their eCommerce vertical by 353%, and continues to leverage content-to-commerce via their projects page, even as they are opening more concept stores at select locations.
Michaels' change in fortune is a testament to how data-led decision-making and active measurement of eCommerce performance through metrics can help brands find new revenue opportunities, grow sustainably, and build a durable, scalable business.
Like Michaels, many eCommerce businesses started leveraging metrics and measurement and optimizing their business around it. The rise of post-COVID subscriptions is a direct consequence of this exercise.
By helping businesses spend lesser on customer acquisition and earn more from each customer through recurring charges, subscriptions deliver on many mission-critical eCommerce metrics, including the CAC-LTV ratio (explained further below).
However, as entire business models (and the technology surrounding them) transform, it is only natural that the degree of intelligence applied to monitor growth, identify experiential gaps, and optimize processes evolves with the industry. The same metrics that got businesses here won't take them much farther.
D2C subscriptions are characterized by continued post-purchase customer engagement. This means paying keen attention to metrics beyond the first purchase can help tailor customer experiences and yield better long-term rewards than just focusing on transitory acquisition metrics.
The right approach to subscription eCommerce metrics is to cluster them basis the stages in the customer journey they impact the most.
Retrofitting metrics to your customer journey does not only help structure subscription eCommerce measurement, but it also helps organize information and identify the stages most prone to churn.
Below are ten critical subscription eCommerce metrics and a dive-down into their importance, caveats, and impact on your business-
Customer acquisition cost is the average amount spent on acquiring each new customer over a defined period. Typically used in tandem with Lifetime Value (LTV), CAC is an excellent proxy for a D2C subscription business's capital efficiency since it provides marketing and sales expenses visibility.
A lower CAC indicates strong brand awareness and customer acquisition funnel, while a higher CAC can uncover a potential perception or awareness problem.
CAC is calculated as the total cost of acquiring customers divided by the actual customers acquired over a given period. The 'cost' is your total spend on sales and marketing costs.
Things to note when calculating CAC:
Calculate both sales and marketing costs, including salaries and tools used for the defined period
Do not calculate CAC for a short time interval (e.g., one month) since marketing influence on your potential customer is a drawn-out process and may take a little more time. Instead, calculate CAC over three months or more.
For subscriptions with a free trial period or non-payable months, it's essential to add the product & support costs to the total sales and marketing costs. This is because product trials also influence purchase decisions.
The calculated number of customers should exclusively contain new paying customers acquired.
Don't involve upsells in the same period because it does not always happen due to marketing or sales touchpoints but more because of customer success.
How to reduce CAC:
Engage your audience who interact with your sales/marketing touchpoints faster. Delaying lead nurturing can mean losing potential customers to competitors, especially in a hypercompetitive industry like eCommerce, where time spent on decision-making is lower than in SaaS.
Identify areas with high customer dropoffs, and optimize/conduct A/B testing. If your pricing page witnesses high dropoffs, try couponing and discount management to convert new customers
eCommerce prioritizes convenience and competitive pricing. A dichotomy between pricing expectations and reality might strongly impact CAC. Optimize pricing through pricing experimentation to identify and address gaps faster
When building solid inbound interest, it is essential to measure the impact of first-degree touchpoints in convincing your customers to make the first purchase. Think of conversion rate in terms of adding granularity to your CAC data.
The conversion rate is the percentage of your website/digital storefront visitors who directly convert into paying customers. The percentage of considering or potential customers converted into first-time subscribers in the subscription eCommerce context.
For eCommerce businesses that operate on a blended model, enabling both one-time purchases and subscriptions, it is essential to calculate the two metrics separately to factor in the differing impact on revenue.
For this, we first break down the transactors depending on the below three categories:
One-time purchases (single or multiple, per customer)
Subscription purchases (single or multiple, per customer)
Blended cart checkouts
Customers with blended checkouts are calculated as a part of both one-time purchasers and subscribers, while the other two are mutually exclusive by nature.
This gives us the total number of one-time purchases-
And the total number of subscription purchases, as follows-
With that in mind, the eCommerce conversion rate is tracked as below -
For one-time purchases
For eCommerce subscriptions
To explore conversion rates on an individual page level, apply the same principles for each page within a defined time period. It can also help you understand and optimize your marketing funnel by giving you a comparative measure of conversions.
Things to note when calculating eCommerce conversion rate:
Separate one-time and recurring transactions to find an accurate reflection of eCommerce marketing on your revenue
Average eCommerce conversion across all industries has risen by 0.04% to 1.74% in January 2022. Since subscriptions (being long-term exchanges) are a lot more decision intensive, hence the ideal subscription eCommerce conversion rate is pegged at a minimum of 2.5% versus ~3.9% for the global eCommerce industry.
Remember, conversion rate optimization (CRO) is a continuous process of making small changes in every instance.
Steps to improve eCommerce conversion rate:
Localize your landing pages to make them more relevant and personal to your visitors and meet them where they are.
Identify high and low-engagement touchpoints throughout your website/platform and optimize your UI/UX accordingly.
Reduce the number of steps to checkout to minimize dropoff opportunities and nudge customers to checkout faster.
Both customer acquisition cost and customer lifetime value (LTV) are critical for eCommerce businesses to understand each customer's profitability and actual value.
The lifetime value is their total worth to a business over the entire relationship. Hence, if your CAC is higher than your LTV, it singularly points to an unsustainable business model. It is because you are burning cash to acquire customers without even breakeven.
The optimum CAC-LTV ratio is as follows-
Things to note when calculating the CAC-LTV ratio
The lifetime value per customer should be 3-5X the acquisition cost for the same customer under normal circumstances.
CAC-LTV isn’t uniform in eCommerce. Not even for the same product and the same customer. It is due to deep discounting, seasonal sales, or even free trial months as an acquisition channel. High CAC-LTV can mean lesser long-term excitement/need for the product.
Steps to improve the CAC-LTV ratio
Identify and prioritize channels with a solid cost-acquisition tradeoff. Paid advertising might bring a bulk of customers but at the risk of impacting your CAC and hence, long-term profitability. Instead, since 81% of retail shoppers research online before buying, making inbound a long-term growth channel for your acquisition strategy can be far more lucrative.
Personalized recommendations at the cart, during checkout, or an ongoing subscription can also boost LTV through cross-selling
Enable offer-based retargeting at the exit. It helps reconvert churning customers without spending additional dollars on acquisition.
It is perhaps the most critical metric determining customer loyalty and the efficacy of your subscription offering. On its face, the renewal rate is a reasonably straightforward metric to track. It is calculated as below -
You can apply the same principle to find revenue renewal rates as -
However, the practical implementation of it is far more complex for subscription eCommerce.
Imagine the following journey where a customer first purchases a subscription, then proceeds to initiate cancellation, but is ultimately retained with a lucrative retention offer -
Here, the variables that impact your retention calculation are-
An increased tenure for the customer v/s average tenures for other renewals
Updated pricing for the specific customer
To retrofit the new data into the equation, you must now-
Identify the monthly value derived from Customer A (total ticket size/tenure)
Find the variation coefficient (Monthly value/Avg. Monthly value per customer)
Since the customer count is 1, multiply the variation coefficient by 1. In case the same retention is triggered for multiple customers, then multiply the variation coefficient by the number of customers who are paying less for more prolonged engagement
As you can see, renewal rates can be as simple or complicated as your existing revenue model.
Steps to improve renewal rate
Identify customer intent. High-intent customers are more likely to renew their subscriptions at the actual price. Expending offers and discounts on such customers can adversely impact revenue.
Integrating customer support with a post-purchase nurture flow can build strong brand affiliations, increasing cross-sell opportunities. Addressing customer queries while giving them additional means to achieve their goals is a great way to display customer centrism.
Any subscription business, irrespective of their industry, obsess about churn, and with good reason. It is both a crystal ball that helps predict revenue growth and the yardstick that proves the pudding for your subscription offering.
A significant churn is indicative of either/all of the following:
Opportunity to improve product quality
Sustained/unaddressed subscription experience hiccups
Short-term need/demand for the product/subscription SKU
It is best to bring specialized churn monitoring and intelligence to your tech stack. It helps you identify the specific reasons for churn, analyze patterns and address gaps. On the other hand, it makes reconversions that much easier. Take the image below as a reference. Tools like Brightback do it by first identifying churn reasons, then applying the same rationale in each targeted win-back campaign to make offers more individually relevant.
If you do not have specialized tools in the process you can calculate churn (for a specified period) with the underlying formula:
It is essential to understand that customer churn should be independent of your acquisition funnel. While the latter defines the efficacy of your marketing, sales, and inbound efforts, the former is a better reflection of retention. Hence, calculating churn without accounting for newly added customers in the denominator might sometimes be misleading.
You can also apply the same principles around churn to address revenue leakages when customers downgrade on their subscription plan, which is reflected as Net MRR (Monthly Recurring Revenue) Churn Rate. Learn more about Net MRR Churn Rate below:
During the annual board meetings, this is the be-all and end-all for eCommerce product managers. In simpler terms, it calculates the impact of your subscription business model on your overall revenue.
Typically a SaaS metric, ARR has evolved and adapted to the subscription eCommerce use-case to contextualize subscription success. It is more relevant for eCommerce businesses with a developed subscription setup (considerable subscription revenue share + multiple subscription plans over the same billing period).
Prerequisites in ARR calculation:
revenue gain from add-ons to existing subscriptions
Monthly recurring revenue
In the presence of subscription analytics (and correspondingly, the ability to monitor monthly subscription revenue), ARR is calculated as follows:
If you do not have a clear insight into MRR for your business, calculate ARR as-
ARR is an orchestrator metric - which means it allows for a more complex decision-making mechanism to be read against goal conversion rates, churn percentages, or potential roadmap/pricing changes. Suppose optimizations for those mentioned above have a low impact on ARR. In that case, it is detrimental to the long-term growth of your business and is a sensitive risk to take.
Monthly Recurring Revenue (MRR) is recurring revenue earned from subscriptions in a particular month. It includes the recurring items in your subscriptions, such as coupons, discounts, recurring add-ons, etc., and discounts on one-time charges like setup fees, non-recurring add-ons, non-recurring ad hoc charges, and taxes.
MRR gauging adds specificity to your subscription data. You know precisely how your subscriptions are performing, and (what's better), you can discover seasonalities behind revenue hikes (or falls).
In its simplest form, MRR is the total of all recurring revenue generated in a month-
Subscription eCommerce businesses can only hope things are this simple. Monthly revenue is a flux and depends on
New customers added
Up-selling/cross-selling subscription plans
To do justice to your MRR calculation, you should:
Account for added and detracted customers
Account for downgrades/upgrades
You should also account for discounts and seasonal offers.
Do not consider bookings as subscriptions
As much as it is necessary to monitor progress, it is also essential to understand that metrics should work to uncover value for your business and not the other way around.
Tracking each metric in the list above is also contingent on your existing processes, your stage in the business lifecycle, and your customer patterns. A business that is only starting needs not invest a lot of time and effort diving deep into each specific measurement until it reaches PMF. Nor is it expected to have the degree of technical nuance in capturing all its generated data.
On the other hand, if you are a scaling subscription eCommerce business with a solid customer base that is primed to or is evaluating changes like expansion, new product lines, etc., evaluating consumption patterns, metric measurement is a key focus. In such a case, some key considerations are -
Incorporating subscription analytics within your management and billing systems or evaluating 360-degree subscription management tools that provide out-of-the-box subscription analytics
Building seamless information exchange between customer touchpoints - CMS, order fulfillment, etc.
Ensure that your affiliate revenue or acquisition streams (e.g., discounting and couponing, dunning, etc.) are constantly monitored.
By capturing data effectively, you can better understand your customers and identify unaddressed gaps and opportunities to help your business grow further.