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Analysis

Analyzing Retention Rate for Subscription-Based Businesses

One of the biggest draws of running a subscription-based business is that you’re guaranteed to collect recurring payments from your satisfied customers. But how can you make sure you understand their needs enough to retain them?

Matt Duczeminski
September 01 2017

Real quick:

How many subscription services are you a member of?

If you’re anything like me (or my wife!), you might not even know offhand how many active subscriptions you have going at the current moment.

And you’re not alone.

Whether we’re talking about utility-like services (such as cable, internet, or Netflix) or product-based services (like Loot Crate or FabFitFun Box), there’s no denying that running a subscription-based business can be a rather lucrative proposition.

That is, as long as you keep your customers on board.

Obviously, one of the biggest draws of running a subscription-based business is that you’re all but guaranteed to collect recurring payments from your satisfied customers on a regular basis.

That being said, it’s important that you know which metrics to analyze when assessing your company’s ability to retain customers – and its ability to generate profit.

I’ll discuss the key performance indicators of customer retention for subscription-based companies, as well as some of the pitfalls to avoid when doing so.

But first, let’s talk about retention rates of subscription services as a whole.

An Overview of Retention Rates for Subscription-Based Companies

Former CEO of Dejamor (a subscription service for couples with a romantic side) Rodrigo Fuentes reports that when he was seeking out investors for his company, he was told:

  • A retention rate of less than 80% is “not good”
  • A retention rate of 80-90% is “a decent start”
  • A retention rate of 90% or more means you’re “onto something”

The reasoning behind these claims is as follows:

If less than four of every five of your customers actually renew their subscription, they’re essentially using your subscription-based service as a one-time transaction – which defeats the entire purpose of running a subscription company in the first place.

If you can get nearly 90% of your customers to stay on board, the lifetime value of your customers will begin to increase. Once your retention rate hits 95%, you’ll almost certainly generate a large amount of profit per customer.

None of this, however, is 100% set in stone.

In truth, retention rates among subscription-based companies vary depending on a number of factors (such as the type of products or services you offer, or even the time of year). So while the above guidelines can give you a general idea of where your retention rate should hover, you’ll need to look a bit deeper into your industry’s standards to get a more accurate idea.

It’s important to recognize that analyzing retention rate in general isn’t enough to determine your company’s profitability. For example, you’d also want to know how long a churned customer had been subscribing prior to their cancellation; it’s this additional metric that will tell you if the relationship with that customer was profitable or not.

Key Performance Indicators 

Retention rate is only one piece of the retention-in-subscription-based business-puzzle.

To get the full picture, you’ll need to consider the following KPIs, as well. In doing so, you’ll not only be able to gauge your company’s overall performance, but you’ll also be able to hone in on specific aspects of your business – and fine-tune them in the process.

Overall Profit

Assessing your company’s profit margin clarifies how much money you’re currently making.

But there’s more to it than that.

Checking the numbers related to your company’s monthly profit also forces you to ask yourself questions such as:

  • Are we making as much as we could (or should) be?
  • Where are we losing money and not seeing much in return?
  • What could we do differently to increase profits and decrease expenses?

As you likely know by now, it costs much less to keep a customer on board than it does to bring on a new one. Increasing your company’s retention rate is one of the most effective ways of keeping your profit margins high.

Of course, you’ll then want to figure out the most effective methods of keeping your customers on board.

As we said earlier, while customer retention is important in every business, it’s the entire point of running a subscription-based company in the first place. While single-transaction companies can, theoretically, thrive even with a low retention rate, it’s near impossible for a subscription-based business to do the same.

Looking at it from the other way: a high profit margin is a sure sign that your customer retention efforts are doing exactly what they need to be doing.

Return on Investment

ROI is inextricably linked to retention rates within a subscription-based service.

But, whereas measuring profit requires you to simply look at money “in” and money “out,” measuring ROI requires you to consider your cost and profit per customer. In doing so, you’ll inherently consider retention as major contributor to ROI.

For example, say it costs your company $100 to provide your service to an individual customer during their first month, and $50 for each subsequent month – and you charge $150 per month for your services. This means your ROI for a customer’s first month is 50% ([$150 – $100] / $100). The ROI gained from an individual customer will grow as time goes on (reaching, in this example, over 170% by the tenth month).

So, while measuring retention is definitely important, it’s also essential that you figure out exactly how much you stand to gain by keeping your retention rate high.

Trial Retention

You’ve probably heard the saying “if it’s free, it’s for me!”

Simply put: It’s pretty easy to get people to sign up for a free trial of your subscription service – even if they don’t really fit the profile of your target customer.

Of course, it’s much harder to convince trial subscribers to convert to paying customers.

First of all, you’re almost always going to lose the customers who signed up for the trial without actually needing your service in the first place (unless you were able to “wow” them within their trial period).

Secondly, there are any number of reasons a customer on the fence will decide against paying for your services. Maybe your service didn’t meet their needs, or they believed your asking price was too high. Perhaps they were unsure of their own level of commitment to your subscription-based service. Or, it might be that, for one reason or another, your service just wouldn’t fit into their life in the long run.

On the other hand, once a trial subscriber becomes a paying customer, you can be pretty sure they’ll stick around for at least a little while into the future. These individuals have had some time to engage with your service, and have made the conscious decision to shell out their hard-earned cash for your full services (and will hopefully continue to do so).

There are a few reasons it’s important to pay attention to trial conversion and trial retention rates – and these reasons intertwine.

If you don’t offer potential customers a trial period with your services, it’s likely that many first-time customers might end up churning after their initial time period has expired. This would, of course, count toward your overall churn rate – but they wouldn’t exactly mean the same thing (e.g., a churned customer who purchased a subscription just to test the waters isn’t the same a long-time customer who decided to cancel their subscription and head to your competitor). To categorize each instance of churn, you’d need to dive deeper into the context surrounding each of these moments.

But, if you do offer a trial period, you’d be able to separate your trial churn rate from your overall churn rate.

You could, in turn, use this data and make a variety of improvements to your operations, such as pinpointing a problem with your onboarding services, fine-tuning your target personas, or determining the most important features and benefits to offer your customers immediately upon conversion.

Retention Rate by Cohort

Looking at retention rate from a bird’s-eye perspective will only give you a general idea of how well you’re actually providing for the needs of your customers.

It can also be a bit misleading, as well.

Say, for example, you’re trying to determine your retention rate for a given time period (say January to March). You’d only want to consider the number of customers you already had on January 1st, then look at how many of those customers are still around on March 31st.

You’d ignore any new subscribers that began their subscription during the time period in question. Reason being, customers who came aboard in late March, for example, would skew your calculations and make your retention rate appear higher than it actually is.

We’ve seen retention rate formulas that include the summation of customers “in” and customers “out,” but, again, this only serves to skew your results.

For example, knowing that you had 100 customers at the beginning of the time period and 105 at the end doesn’t say anything about your retention rate. Maybe you lost 20 customers and gained 25; or maybe you lost 5 and gained 10. Or, maybe you didn’t lose any, and actually gained 5 customers.

In the first instance, you failed to retain 20% of your customer base – a retention rate of 80%. In the second example, you lost 10% of it – 90% retention. In the last, you didn’t lose any customers, and have an astounding 100% retention rate for the time period.

Yes, in each instance you end up with 105 customers – but we’re concerned with retention, not growth. Think about it: why would we consider new customers if our focus is on determining how many existing customers are still around?

(Note: The same goes for assessing churn rate, as well. Don’t let new customers distract you from pinpointing instances in which you’ve lost a number of customers who had been providing epic levels of ROI to your business.)

Conclusion

We’ve said it before, but it bears repeating:

Customer retention is paramount to the success of a subscription-based company. Being able to keep customers coming back for more, month after month, is what makes a subscription service a subscription service.

But a lot more goes into analyzing customer retention than simply looking at how many re-subscribers are among your customer base. You also need to consider the steps they take to become subscribers, how long they stick around, and how much profit they generate for you in the process.

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Matt Duczeminski

Matt is a professional writer specializing in helping entrepreneurs improve relationships with their customers. He lives in Philadelphia with his wife, Sarah, and he'd probably get a lot more work done if his cat would stop bothering him.

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