Why software Subscription Models offer better reporting metrics
by Niclas Lilja, on Mar 20, 2018
When it comes to software, the traditional business model is learning that there are crucial pieces of information that are missing from their reporting metrics. With the subscription business model, companies can have greater control over the results for the long term. We know that subscription businesses can be more agile than their traditional model counterparts - and what it really comes down to is data.
The metrics you can measure through a subscription model can vary greatly from traditional software. In fact, you need to measure these other data points in order to attain better long-term growth and sustainability.
1. Revenue recognition
One of the biggest advantages of the subscription model comes in the form of revenue recognition. Through reporting metrics of subscription contracts, commitments, upsells and more, you can accurately begin to predict the revenue coming in and the liquidity you can expect. When customers are subscribing to your product or service, there are certain commitment periods, or guaranteed price for a given period of time (think one-time, yearly fees, etc.). Having guaranteed revenue that you can see clearly is a major advantage when typically future sales are largely unknown.
When you use established SaaS metrics and trends to conduct forecasting, you can make better, more accurate budgets, reinvest money into hiring or product development, and project your future growth. Or, if you find your business is under performing or you are not projecting the results you had imagined, you can take action to change the course of your business before the last numbers come in and it's too late to do anything about them.
2. Customer Lifetime Value
While technically you can calculate customer lifetime value (CLV) with a traditional software model, it becomes much more accurate and clear with a subscription model. Similarly to revenue recognition, the data points you can collect regarding customer's average commitment periods will be easier to measure and predict than those of one-time purchases. With traditional software, it can be difficult to capture or predict if a customer is likely to make future purchases or upgrades.
With subscriptions, you can see each step of the customer life cycle. From first initial conversion, to upsells and renewals, to seeing predictors of drop-off and customer churn, you can better understand what each customer is worth. Being able to understand CLV means that you can more easily measure cost per acquisition (CPA) of your marketing and sales efforts, and return on investment (ROI) of these efforts over time.
3. Customer Churn
One of the most important metrics for SaaS subscription companies to measure is customer churn. With traditional models, churn can't really be measured, because often there is a one-time upfront cost with perpetual license agreements, and little visibility or predictability of customer "loss." Consider how you may calculate your churn rate. For many B2B companies you may have 10-20% of the customers accounting for more than 80% of the revenue. If ACV or ARR is 100, 1 customer churn may be worth $10 or 10% churn, and another customer churn is worth $2, or 2% churn. The churn in this case is depicted by how much new sales (in dollar amount) is needed just to stay on the same revenue level.
When you can measure real customer loss, you can also find the potential reasons behind it - and then take action. For example, maybe you introduce a new pricing tier structure, only to find more customers are dropping off. You may need to reevaluate your tiers, or identify if the price points for features being offered are not seen as a good value. You can then adjust your offerings or pricing model, and see how this affects the churn rate. By reducing your customer churn rate, you'll be able to increase your monthly recurring revenue, and get a better handle on your revenue recognition.
There are many advantages of the software subscription model over traditional models, and the major one is metrics reporting. Through subscriptions, you'll be better positioned to measure and understand revenue recognition, customer lifetime value, and customer churn, putting you in a position for having control over sustainable long-term growth.
Want to learn more about the best practices for transitioning to a subscription model software business? Download the White Paper now.