Guide to Subscription Model Success | PossibilIT

Many of the metrics below can be determined at different levels. It is therefore important to know which level is given or asked for, and whether it concerns a total or an average:

1. Subscription
2. Customer (based on all subscriptions of that customer)
3. Cohort (based on all subscriptions of a group of customers, to analyze trends and patterns). For example, all customers who subscribed to a certain offer in a particular month.
4. Product (based on all subscriptions with that product)
5. Business (based on all subscriptions of all customers)

Annual Contract Value (ACV)

ACV is the annual total of recurring subscription costs for the customer. For companies that charge one-time fees in addition to recurring fees, the ACV may be higher in the first year than in subsequent years.

Annual Recurring Revenue (ARR)

ARR represents the annual revenue from all subscriptions and is an indication of the health of a subscription business. It provides a predictable revenue picture. To calculate ARR, multiply the monthly rate (MRR) by 12. If there are no annual contracts, use the MRR calculation.

Average Revenue Per User (ARPU)

ARPU is the average revenue per subscriber over a certain period. It provides insight into revenue per user. Many companies aim to increase ARPU.

Committed Monthly Recurring Revenue (CMRR)

CMRR represents the fixed monthly revenue from subscriptions, excluding one-time revenues and usage-based revenues. For monthly business, the CMRR forms the absolute basis and a guarantee of what comes in. It can be attractive in a usage-dependent subscription model to agree on a fixed minimum amount with a customer, for example, as an advantage for the customer, an attractive rate for the consumption that exceeds the minimum in a month. If there is no fixed monthly minimum amount agreed in such a situation, such as in a "Consumption Based" or "Pay-as-you-Go" situation, then you might consider determining the CMRR based on historical data.

• Sometimes the C in CMRR stands for Contracted instead of Committed. This will only make a difference in cases where the committed amount is not also a contractually obligated amount, or is a different amount.

Delta Monthly Recurring Revenue (DMRR)

MRR shows the monthly changes in subscription income due to various (often more difficult to predict factors) such as consumption, upgrades, or churn. Delta MRR is often calculated over already completed periods, or based on the difference in MRR in the month before and the month after a certain change. But as a business, you can of course also aim for a certain positive Delta MRR.

Monthly Recurring Charge (MRC)

These are fixed costs paid monthly by subscribers for their subscription.

• Sometimes the term MRF is also used, where the F stands for Fee. Especially relevant if it is a fixed amount, and thus not dependent on a number, as in charges of the type “p times q” (= PricePerUnit x Quantity).

Monthly Recurring Revenue (MRR)

The MRR is the monthly value of a subscription and plays an essential role in various subscription calculations. It is calculated by adding up all annual recurring costs (excl. VAT) and dividing by 12. It is important to note that this is not a standardized calculation.

• Discounts that you give to the customer, for example, are not always included in the MRR calculation, while reduced prices are visible in it. A fixed discount amount could theoretically lead to a negative net charge amount. Therefore, the discount is usually capped, and your net charge amount comes out at its lowest at 0. Such situations make MRR calculations that include discounts very difficult.
• Temporary discounts are often also not included in MRR calculation, while ongoing discounts are included. Temporary discounts are much more attributed to marketing or sales costs, as well as sales bonuses.

MRR Churn (MRR Attrition)

These are measurements of the monthly loss of income due to churn (customers who cancel or do not renew).

• MRR Churn Rate is the percentage of MRR Churn in a month compared to MRR at the beginning of that month. This is a measure of customer turnover within a certain period and is an essential indicator of the vitality of a subscription business. It shows the percentage of customers who have canceled their subscription.

MRR Renewal

This represents the monthly income from the renewal of existing subscriptions.

• MRR Renewal Rate is the percentage of MRR Renewal in a month compared to the total MRR of all subscriptions that could have been renewed in that month.

Total Contract Value (TCV)

TCV shows the full value of a customer contract over its entire duration. This includes one-time costs, periodic subscription costs, and other related revenues, thus showing the maximum potential value of a customer.

Churn

Churn concerns existing customers who cancel their subscription or do not renew. There can be various reasons for churn, and it is important to know why. Such as:

• The service provided is too expensive
• The service provided is used too little
• Or only a limited part is used
• The service provided has too many disruptions
• Aftercare and support is perceived as insufficient
• A competitor has a more attractive alternative
• There is a too attractive offer for new subscribers.
• So existing subscriber first cancels, and then immediately starts with a new subscription.
• In most cases, it is cheaper to retain an existing subscriber than to acquire a new subscriber, or to bring back a departing subscriber. So then it is worthwhile to take measures that lower churn.
• Often there are indicators that there is an increased risk that a customer will cancel. Think of:
• Customer no longer pays or often pays too late
• Customer no longer uses the service or not often
• Customer significantly reduces the number of licenses
• Customer frequently reports complaints
• Customer searches online for contract details, for cancellation conditions, or for current prices and offers

By making the above Churn Indicators measurable, one can then set up Churn Alerts, and act proactively within the organization. It is also possible to combine all current indicators and compare these with historical data, to come up with a calculated Churn Risk number, which gives a degree of probability that a customer will soon cancel. One can then act proactively on this as well.

Negative Churn

This concerns the situation where the total subscription revenue increases. The total of the revenue from new customers and the increase in revenue from existing subscribers who have started spending more is higher than the loss of revenue due to churn of subscribers.

Negative Churn

Also used synonymously with negative revenue churn, which concerns a state of revenue and the net churn of subscription companies when new revenue. Renewal Ratio over the Lifecycle This is the renewal rate of subscriptions over the lifecycle of a contract.

Renewal/Retention Ratio

These respectively measure the renewal rate of customers and the percentage of retained customers over a period.

Cash Flow

Cash flow shows the income or expenditures over a certain period. For subscription businesses, this is mainly derived from subscription sales. Cash flow forecast concerns the projection of future cash flows in the company, based on current and expected subscriptions.

Conversion Ratio

Conversion ratio measures the percentage of users who switch, such as from a free to a paid subscription.

Lifetime Revenue per Customer

This is an estimate of the total revenue that a customer will generate during their lifetime as a subscriber. Customer Lifetime Value CLV estimates the total value of a customer over their entire lifetime, taking into account both revenues and costs.

Deferred Revenue

This is revenue that must be recognized over time, as opposed to immediately earned revenue. Earned Revenue Earned revenue is the revenue realized after completion of a sale, even if payment is still to be made.

Growth Efficiency Index

GEI measures the costs required to generate $1 of additional annual recurring revenue.

Lifetime Value

LTV is another term for CLV, which estimates the total value of a customer over their entire lifetime.

Net Retention

The percentage of customers retained by a company after deducting departing customers and adding new customers. An indicator of customer loyalty and growth.

New Customer Growth Rate

This is the pace at which new customers are acquired.

Revenue Recognition

The process of officially recognizing revenue in a company's financial reporting. It determines when transactions are recorded based on certain criteria, such as when a product is delivered or a service is completed.

VAT (Value Added Tax)

A consumption tax levied on the added value of goods and services at every point in the production or distribution cycle.

Subscription Renewals

Also called prolongation is the process that each customer goes through when they continue their subscription to the next billing cycle.

Subscription Management

Subscription models have grown exponentially in recent years, with a growth rate of 99% in 2021, because it is a win-win situation for both customers and retailers.

Customer Onboarding

The nurturing post-purchase process that familiarizes new users and customers with your company and product. This is usually in the form of an automated email containing instructions, manuals, and account/login details of the product/service.

Customer Relationship

Is about building and maintaining a positive relationship with consumers. It involves understanding and communicating well with your audience.

Customer Retention

One of the core objectives of a company for target and revenue stability. It is the ability of a company to retain its customers over time.

Customer Success

A method to ensure that customers achieve their desired results when using a product or service of an organization. It includes the entirety of post-sales services.

Customer Engagement

The depth of the relationship that a customer has with a brand or company.

Customer Expansion

The growth and retention of existing customer relationships by offering new products or services.

Customer Success

A method to ensure customers achieve their desired outcomes when using a product or service from an organization. It includes the entire suite of post-sales services.

Customer Engagement

The depth of the relationship a customer has with a brand or company.

Customer Expansion

The growth and retention of existing customer relationships by offering new products or services.

Client Success

A focus on ensuring that customers achieve their desired outcomes through the use of a product or service.

Product Adoption

Describes the process by which users become aware of a product, understand its value, and begin using it.

Product Introduction

Often known as user onboarding or customer onboarding, it is introducing your product to users to start business after their subscription.

Customer Acquisition

The process of attracting and converting new customers.

Cross-Selling

Selling an additional product or service to an existing customer.

Up-Selling

Selling a higher level or more expensive version of a product or service to an existing customer.

Customer Feedback

Information or opinions given by customers about a product, service, or experience.

Customer Health

A metric that indicates how likely it is that a customer will stay, grow, or leave.

Customer Journey

The complete experience a customer has with a brand or company from first contact to the end of the relationship.

Customer Journey Map

A visual representation of the steps and stages a customer goes through when interacting with a brand or company.

Customer Lifecycle

The steps and stages a customer goes through from the first contact with a brand or company to the end of the relationship.

Automated User Engagement

An automated process where companies try to keep their users engaged with their product or service.

Customer Satisfaction Survey

Used to understand the level of satisfaction of your customers with your organization, products, services, or experiences.

Customer Success Metrics

The metrics that customer success teams and account managers can track to see if they are working effectively and how well a customer is doing.

Customer Surveys

Used to gather feedback from their customers on a range of topics and to gauge how customers feel and think about the product/services. This type of feedback often serves as the basis for further expanding the functionalities of a product/service.

NPS (Net Promoter Score)

A metric used to assess customer experience programs. NPS measures customer loyalty to a company and also predicts business dealings.

Engagement Score

This is a measure of customer engagement, based on activity and usage.

Freemium

A business strategy often used by companies in the subscription world. It offers certain product features for free so users can familiarize themselves with the essential functionalities.

Trial Subscriptions

A business strategy that gives customers the opportunity to try out a product for a certain period (usually 14 days) (common with SAAS products). Here, companies offer the opportunity to usually try the most comprehensive version of the product. This can be in a paid (at a lower amount) or unpaid form. This can be with the registration of a payment method or without (email address, first name, last name) During the trial period, sales actions can occur, such as:

• Contacting the customer by Sales teams
• Automated emails with a special offer
• Extension of trial period

After the trial period, when a payment method is already registered, the subscription can automatically be converted to a paid subscription.

Rights or Entitlements

The rights given to customers to use certain products or features. In the SaaS business industry, the right of entitlements is of great importance.

SKU (Stock-Keeping Unit)

A unique identification code, usually an alphanumeric combination, used to track a specific product in a stock or inventory.

Order Fulfillment

The process of handling and completing a customer order, which may involve picking, packing, and shipping products.

Phased Agreement

A type of business agreement where terms, such as pricing, change gradually over a period, often to help a customer adapt to a new product or service.

Consumption-Based Billing

A billing method where customers pay based on their actual use of a service or product rather than a fixed amount. Billing of this is always done afterward.

Payment Service Provider

Better known as PSP (Payment Service Providers), are companies that offer online services for accepting electronic payments by various payment methods, such as credit card payments and bank transfers.

SEPA (Single Euro Payments Area)

An initiative of the European Union to facilitate the transfer of euros between banks in the European member states. The goal is to make cross-border payments as easy as domestic payments.

Revenue Recovery

A collective term for collecting uncollected revenue. Think of Dunning, dealing with failed payments, and the resulting (involuntary) churn.

Dunning

In the subscription world, dunning is the collective term for all processes around collecting failed direct debits. These can be failed payments (failed payments), chargebacks, smart dunning (automated direct debit attempts), and actions that occur after the expiration of payment terms. Think of digital reminders (friendly reminders), but also to proceed to dunning defaulters via collection agencies (physical letters and visits).

Failed payments

Failed collections occur in situations where:

• There is not enough money in an account
• Payment methods have expired (credit card)
• Bank account numbers have changed and the registration of this with payment service providers (PSPs) has not gone well.
• Technical malfunctions

This may cause involuntary churn (see Churn definition) To deal with this as quickly and efficiently as possible, there are tools/solutions that provide a clear overview and insight. Examples include setting up Dashboards supported by reports, but also setting up automated tools, such as smart dunning and email notifications.

Smart dunning

This is a feature used to set up automated direct debit attempts. Think of configuring how often attempts are made per day, week, or month. This can be deployed based on the payment method used. SEPA payments can be in transition for 3 to 5 days, so you don't want to make unnecessary attempts in the meantime. Credit card attempts can be made several times a day.

(Automatic) Direct Debits

With an automatic direct debit, the customer gives permission to automatically withdraw an amount from his account. Ideal, for example, is a one-time authorization to claim an amount. For recurring payments (subscriptions), a PSP can convert this authorization into a reusable authorization (token or mandate) for future claims.

Chargebacks

Chargebacks, better known as stornos, are reversals performed by a customer through the bank. This is an option that banks offer for customers if they, for example, disagree with the offered services. In the Netherlands, a customer has the right to do this up to 8 weeks after a payment. A consequence of this is that invoices change status again (unpaid or still to be paid).

Audit Checklist

A list used during audits to ensure that you follow all steps and do not overlook anything.

Risk Framework & Strategy

An analysis of current practices and improvement points as a basis for a discussion on the wishes that the risk policy should meet. Think of a strategy and the organization's risk appetite. This also looks at the systems, instruments, and work forms within the organization. This leads to defining a toolbox with instruments and processes, with which the risk framework is demonstrably maintained and developed.

Account Expansion

The process of growth within an existing customer account. It is one of the most lucrative aspects of customer success because it is cheaper to sell to an existing customer than to a new customer.

Account Management

The process of managing the relationships between a company and its customers.

Account Planning

Creating a plan to maximize the relationship with a customer account. This includes, for example, picking up the decision-making process, growth strategy, and retention (Customer Retention).

Advocacy

Customer advocacy is also one of the goals of customer success to maximize recurring revenue and increase sales by recruiting customers with the help of customer advocacy.

Playbook

A document or tool that describes best practices, strategies, and tactics for a specific business challenge or process.