Companies offering simple, straightforward business models such as one-time purchases or perpetual licensing, can use simple, straightforward metrics in their financial reporting. But tracking performance under a subscription billing model is a little different, and companies adopting these models will need to look at a new set of indicators to ensure they’re on the path to growth. We break down ten key metrics here.

1. Monthly Recurring Revenue (MRR)

Monthly recurring revenue (MRR) is a foundational subscription billing metric, as it indicates how much revenue a company can expect from subscription customers each month. The basic calculation is straightforward: the number of customers multiplied by the amount they pay per month for their subscription. For the sake of easy math, let’s say you have 100 customers subscribed to your offerings at $49.99 per month. The MRR would come out to $4,999.

MRR data can be cut lots of different ways to give your business exactly the insight you need. For example, you could track new monthly recurring revenue to see how many new subscribers you’re bringing in each month or contracted recurring revenue to see how much of your MRR is contractually obligated (e.g., customers are required to sign up for a minimum of six months) versus simply committed.

2. Annual Recurring Revenue (ARR)

Similar to MRR, annual recurring revenue (ARR) creates a picture of how much revenue is expected from subscription customers throughout the course of the year. To calculate, multiply that base monthly rate by 12, then multiply by the number of customers. To illustrate with the same numbers we were using above: with 100 customers at $49.99 per month, the formula would be 100 x ($49.99 x 12), which comes out to $59,988 per year.

Why calculate both ARR and MRR? MRR offers near-real-time insight into performance and growth, while ARR provides the bigger picture needed for annual forecasting and reporting. (Investors also prefer ARR over MRR, as it offers clear projections for longer-term growth.)

3. Average Revenue Per User (ARPU)

When businesses offer different subscription tiers (basic and premium, for example), the average revenue per user (ARPU) offers a clear look at how much a company is bringing in per subscriber during a given period, such as a year. The goal for any subscription business is to increase ARPU by moving basic subscribers up to premium tiers and/or encouraging add-on purchases.

4. Churn Rate

Churn refers to the number of customers who’ve cancelled their subscriptions during a given period, and churn rate measures how fast (or, ideally, slowly) a business is losing its subscribers. To calculate churn rate, divide the number of cancelled subscriptions in a given period by the total number of customers during that period, then multiply by 100. If, in Q1, you saw 5 of your 150 customers “churn” (or cancel their subscriptions), then your churn rate would be 3.33 percent. While some churn is inevitable, if those rates start to rise above around 4 percent, it’s worth spending some time investigating why customers are leaving and finding a way to address the issue.

Note that revenue churn is a related metric identifying the amount of revenue lost as a result of customer churn.

5. Renewal Rate

The opposite of churn, in a way, the renewal rate refers to the number of subscriptions renewed in a given period (as a percentage of the total number due for renewal at that time). Like churn, you can calculate this as either the number of customers or the value of the revenue renewed. Unlike churn, businesses are looking for high renewal rate as that indicates strong customer retention.

6. Days Sales Outstanding (DSO)

Subscriptions and usage-based renewals bring more payments and more opportunities to (on purpose or not) not pay on time. DSO is a calculation of the average number of days it takes a company to receive payment for the sale. DSO can increase for a variety of reasons. It could mean an upcoming churn, but it could also mean an outdated credit card or new contact information. Collections and Dunning offerings are designed to reduce DSO and improve renewals.

7. Conversion Rate

The conversion rate calculation is very similar for a subscription-based business as for a business that relies on one-off sales. By measuring the number of potential buyers whose status changes (e.g., from lead to customer) in a given period, the conversion rate indicates how effectively the business’s audience is moving through the sales funnel.

In a subscription-based business, however, the conversion rate is often specifically related to the number of subscribers that move from a free trial or free version of the offering into the paid subscription. This metric is crucial for monitoring business health, accurately assessing the pipeline, and forecasting future growth.

8. Customer Acquisition Cost (CAC)

No matter how many customers a business has, it’s important to ensure they’re not costing more than they’re bringing in. The customer acquisition cost (CAC) is another one that overlaps with other business models, and it can be calculated by dividing the amount of money spent on acquisition activities during a given time period by the number of new customers acquired from each activity during the same time period.

Tracking the CAC is a good way to understand which sales and marketing efforts are bringing in the most revenue — and which ones may not be worth the trouble. In doing these calculations, for example, you may find that email marketing is driving more value than conference sponsorship because it’s bringing in more customers at a lower cost.

9. Customer Lifetime Value (CLV)

The customer lifetime value (CLV) is one of the most important metrics subscription-based businesses can measure, as it calculates how much revenue an individual customer is likely to generate during their entire relationship with the business. To find the average CLV, take the APRU for a year and multiply it by the expected customer lifetime, then subtract the CAC from that number. The goal, of course is to ensure the CLV is significantly higher than the CAC, and companies can use this calculation to hone sales and marketing investments to drive long-term, profitable customer relationships.

10. Earned Revenue

Revenue is considered “earned” when the product or service has been delivered fully, which is when revenue recognition guidelines say revenue can be recorded — regardless of when the customer pays. This notion is unique to subscription and usage-based business models that may be accepting payment before and/or after products and services are rendered. In one-off sales, the money and the offering change hands more or less simultaneously, meaning revenue is earned at the same time as payment is received. But for subscription-based businesses those two activities may not happen at the same time, so it’s important to track earned revenue as its actually earned — not just at the time of payment.

These ten metrics — and more — are critical to tracking growth and improving financial performance for businesses working with subscription-based offerings. Tracking them, however, requires a billing system that can handle high volumes of variable data in near real time. To learn how Gotransverse makes complex billing a snap, we invite you to take a tour of our platform today. Then, when you’re ready, request a demo to learn whether Gotransverse is the right billing platform for your organization.