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If you’re running a subscription-based business and struggling with financial forecasts, you’re not alone. In this guide, we’ll walk you through how to build a growth model tailored specifically for subscription businesses. Whether you're scaling your SaaS, membership, or DTC (direct-to-consumer) subscription product, this will help you project subscriptions, churn, and monthly revenue with confidence.
Understanding the Subscription Growth Model
Before diving into the specifics, let’s clarify what a subscription growth model is. This model operates from a top-down perspective, similar to a transaction-based model but tailored for recurring revenue. It’s essential to know how to utilise this model for accurate forecasting.
Key Inputs to Fill In
When filling out your growth model, focus on the highlighted sections (usually marked in yellow). Here’s what you need:
- Historical Data: Use data from the last month or an average of the last three months as a reference point. For instance, if your last advertisement cost was $100,000, this will serve as your baseline.
- Improvement Percentages: For each metric, indicate the percentage you aim to improve each month.
Steps to Build Your Model
- Advertising Budget: Start with your advertising budget. If you want to increase user acquisition, consider raising this budget.
- Free Trials: For instance, if 15% of users who visit your site opt for a free trial, aim to increase this by 5% each month.
- Subscriptions: From the users who start a free trial, track how many convert to paid subscriptions. In our example, 10% of those who trial convert to paid subscriptions.
- Churn Rate: Monitor your churn rate, which is the percentage of users who unsubscribe. If you have 42,000 subscribers and 5% churn, aim to reduce this churn rate by 10% each month.
- Total Users: Calculate your total active users by adding new subscribers and subtracting those who churned.
- Projected Revenue: Multiply your total active users by the average order value (AOV) to find your projected revenue.
Understanding App Success Rate
The app success rate is a crucial metric that reflects the number of users who engage with your product and eventually make a purchase. This metric encompasses the entire user experience—from their first interaction to becoming a paying customer. By improving this rate, you enhance your overall business performance.
Final Thoughts
This growth model may seem straightforward, but it’s incredibly effective for subscription businesses. By following the steps outlined above, you can create a robust forecasting model that helps you understand and predict your business’s financial trajectory.
If you have any questions, feel free to reach out for assistance. I’ve also included a template for you to download below.
FAQs
What is the importance of reducing churn?
Reducing churn is vital as it directly impacts your revenue and customer lifetime value. The lower your churn rate, the more stable your income will be.
How can I improve my free trial conversion rates?
Enhancing your free trial conversion rates involves optimizing the user experience during the trial period and ensuring that the value of your subscription is clear to the users.
What metrics should I focus on for a subscription business?
You should focus on churn rate, customer acquisition cost, lifetime value, and average revenue per user (ARPU) to gauge the health of your subscription business.
For more insights on growth analytics, check out the Resources page, or follow us on LinkedIn and YouTube.
