Membership or subscription businesses can be extremely valuable. Consider your mobile service company for example. It probably has millions of customers paying it every month for service. As a result, monthly revenues are consistent and profits are high.
While some businesses such as health clubs are naturally structured as membership programs with customers paying monthly, virtually any business could add a membership component to its model. For example, customers of a hardware store might pay a monthly fee for special discounts, extended store hours or access to training programs. Likewise, a manufacturer could establish a program whereby it ships customers a predetermined amount of new product each month.
While establishing a membership business can be great, the key is to make sure it’s successful. To do this, you must track and improve the most important key performance indicators (KPIs) for membership businesses. These KPIs are as follows:
Current Member Count/Number of Subscribers: In general, the more members paying you, the better. So, while this metric is fairly basic, knowing what it is and publicly displaying it to your team can ensure everyone focuses on improving it.
One of my clients shows this figure on a big screen television in his office. Along with the real-time membership count, he shows the change in membership versus last month and last year.
Number of Members Added/Dropped: While your overall membership may be increasing, that doesn’t mean all members are staying. That’s why in addition to assessing your total member count, you should review how many new members have joined and how many members canceled each week or month.
The goal is to not only add members, but limit member cancellations. Constantly replenishing your membership base requires costly and ongoing marketing efforts that deplete your profits.
Member Churn Rate: This is the percentage rate at which members cancel from your service. This is important because it shows the scale of your cancellations. For example, having 100 members cancel one month can be devastating if your program only has 200 members. Conversely, if you have 10,000 members, this 1 percent monthly churn rate might be acceptable.
One client of mine assessed his monthly churn rate over the past 12 months. He then set a company-wide goal to decrease this rate. The team rallied behind the goal, decreasing the rate and growing monthly profits by 42 percent.
Average Subscription Length: This KPI digs further into your lost customers by determining their average subscription length. When members pay monthly, as is most common, the longer they stay as members, the more revenue and profits you generate.
One of my clients noticed a huge drop-off in members after five months. Knowing this, he implemented a tactic to fix it. Just before the period where most members canceled, he told members they would be getting a surprise bonus the following month. The majority of members stayed because they were curious and excited to get their bonus. The bonus was a small gift, and it resulted in a three-month increase in average membership.
Lifetime Membership Value: The lifetime value of each of your members, in terms of both revenues and profits, is one of your most important metrics. Your goal is to maximize your lifetime member value. Also, when you understand your average lifetime profit per member, you can optimize your advertising.
For example, for one client, we calculated her lifetime profit per member to be $384 dollars. By setting a desired advertising return on investment of 100 percent, she knew she could spend $192 to acquire each new member. This guided her advertising spend and dramatically improved her results.
You can’t improve performance if you can’t measure it. So, measure these KPIs in your membership business, and start increasing your profits today.
The author is an Entrepreneur contributor. The opinions expressed are those of the writer.
Dave Lavinsky is the co-founder of Growthink, a Los Angeles-based consulting firm that helps entrepreneurs identify and pursue new opportunities, develop business plans, raise capital and build growth strategies. He also is the author of Start at The End (Wiley, 2012).