Subscription Unit Economics

Tiny retention changes compound dramatically. MRR components, churn math, LTV, payback, expansion, cash conversion.

Why sub unit economics differ

Tiny changes in retention compound dramatically. A 90% retained subscription has 10× the customer lifespan of a 50% retained one. Subscription unit economics reward retention obsessively.

MRR components

• New MRR.
• Expansion MRR.
• Reactivation MRR.
• Contraction MRR.
• Churn MRR.
• Net new MRR = sum.

Churn math

• 5% monthly churn = 46% retained after 12 months.
• 2% monthly churn = 78% retained after 12 months.
• 10% monthly churn = 28% retained after 12 months.
• The math is unforgiving; even small churn-rate differences produce massive LTV gaps.

LTV for subscriptions

• LTV = ARPU × gross margin / churn rate (simple).
• Better: sum of expected revenue across cohort with retention curve.
• Discount future revenue for present value.
• Predicted LTV from cohort behavior.

Payback and CAC discipline

• Subscription payback often 12–24 months.
• Long payback acceptable when retention strong.
• Payback ratio (LTV/CAC) targets 3×+ for healthy.
• Channel-level CAC informs allocation.

Expansion economics

• Plan-tier upgrades.
• Seat additions.
• Add-on purchases.
• Usage-based fees.
• Expansion is cheaper than acquisition; invest accordingly.

Cash conversion

• Monthly billing: cash matches revenue.
• Annual prepay: cash front-loaded; capital efficient.
• Discount annual prepay 10–20% typically.
• Long-payback subscriptions need annual prepay or capital reserves.

Advanced playbook

• Cohort retention curves visible monthly.
• Predictive LTV at subscriber level.
• Channel-level LTV.
• Annual prepay incentive optimization.
• Expansion playbook by segment.
• Plan-tier optimization quarterly.
• Churn prediction with intervention triggers.
• Save offer ROI measurement.
• Reactivation campaign tracking.
• Compliance-aware cancellation that still saves where possible.

Common mistakes

• Average-based LTV instead of cohort-based.
• Channel-level LTV missing.
• Annual prepay not offered.
• Expansion under-invested.
• Churn math not understood; small changes ignored.
• Predictive churn missing.
• Save offers not measured.
• Cancellation flow generic.
• Reactivation campaigns absent.
• Plan tier stale.

Operating checklist

• MRR components tracked monthly
• NRR as headline metric
• Cohort retention curves visible
• Channel-level LTV
• Annual prepay incentive
• Expansion playbook
• Predictive churn where supports
• Save offer ROI measured
• Reactivation campaigns
• Plan tier reviewed quarterly

Part of the Subscription Growth series.