[Subscription strategy] Calculating profitability for your subscription-based growth: a practical guide to optimizing your results

In the words of Olivier Lecerf: “Profit is not a company’s end in itself, but the indispensable condition for its continued existence. It is also the best measure of its success.”

This vision perfectly captures what’s at stake when it comes to profitability: far beyond simple figures, it’s the foundation on which a company’s long-term stability rests.

Whether you’re building or expanding your subscription-based offering, calculating profitability is an essential lever for adjusting your strategy and guaranteeing the viability of your actions.

By mastering this information, you can not only assess the performance of your initiatives, but also optimize your resources to maximize their impact.

This guide immerses you in the key indicators that transform your financial data into concrete performance tools, helping you to set your company on the path to sustainable success.

Why is calculating profitability essential?

A company’s profitability cannot be reduced to a simple accounting indicator: it embodies its ability to endure. And these are not just empty words!

According to a study by INSEE, 61% of businesses created in France in 2014 were still active after five years, underlining the importance of mastering financial aspects from the very first years.

On the other hand, almost 40% of companies cease trading before this deadline, often due to inadequate management of costs and margins.

For marketing and subscription managers, it’s no longer enough to attract traffic or generate leads. Every campaign must contribute not only to sales, but also to profit margins.

Every euro invested must yield a measurable and justifiable return, guaranteeing the profitability of the actions undertaken.

Careful management of these indicators is essential, and integrating them into the business plan is vital to planning a sustainable strategy and avoiding the pitfalls that lead to failure.

The main profitability indicators

Profitability can be measured by a series of financial indicators that provide a comprehensive overview of a company’s health.

1. Profit margin

The profit margin shows how much money is left over after direct costs have been paid.

Here’s how it’s calculated:

• Gross margin = (Revenue – Cost of goods sold) / Revenue

In the technology industry, gross margins are particularly high. According to data from CSI Market, companies in the technology sector boast an average gross margin of over 50%. This impressive profitability often enables them to reinvest in innovation and strengthen their competitiveness.

Net margin, on the other hand, takes into account all expenses, including taxes and interest, providing an overview of the net profit generated for every euro received.

2. Return on Investment (ROI)

Return on investment (ROI) is undoubtedly one of the most widely used indicators in marketing and financial management. It enables us to measure the return on investment by comparing the gains made with the costs incurred.

ROI is calculated as follows

• ROI = (Gain – Cost) / Cost

Suppose you invest €2,000 in a marketing campaign to acquire new subscribers. Thanks to this campaign, you generate €8,000 in additional revenue.

To calculate the ROI, do the following:

• ROI = (€8,000 – €2,000) / €2,000 = 3

This means that every euro invested in the campaign has generated €3 in revenue, showing a positive return and suggesting that the investment is profitable.

This indicator not only assesses the immediate return on investment: it also shows whether the acquisition of customers enables them to be retained long enough to amortize the costs incurred, which is essential in subscription models.

3. Return on Assets (ROA)

ROA (Return on Assets) measures how much profit a company generates with all its assets.

This ratio is particularly valuable in times of economic crisis, as it enables us to understand how efficiently a company is using its resources to maximize returns.

It is calculated as follows

• ROA = Net income / Total assets

According to McKinsey analyses, companies with a high ROA are more resilient during crises.

They manage to maintain, or even improve, their EBITDA (earnings before interest, taxes, depreciation and amortization) margins by reducing operating costs while optimizing their assets, unlike less resilient companies, which see their costs rise.

4. Return on Equity (ROE)

ROE (Return on Equity) measures the return on equity invested by shareholders. It shows how much profit a company generates with the money investors have invested in it.

It is a key indicator for assessing a company’s profitability from an investor’s point of view.

A high ROE is generally a good sign of profitability, but it must be weighed against other factors, such as the company’s level of debt.

• ROE = Net income / Shareholders’ equity

An ROE of 10% means that for every euro of shareholder equity invested, the company generates €0.10 in profit.

Break-even point: the compass for your decisions!

Finally, the break-even point indicates the point at which revenues exactly cover costs, marking the point at which a company begins to generate profits.

Before this point, the company is operating at a loss; beyond it, every additional sale contributes directly to profits.

Here’s how it’s calculated:

Break-even point = Fixed costs / (Unit selling price – Unit variable cost)

• Fixed costs: Stable expenses (rent, salaries, etc.).
• Unit selling price: Invoiced price per product.
• Variable unit cost: Costs directly linked to the production of each unit.

Let’s take a more telling example: if your fixed costs are €100,000, and you sell a gourd for €50 with variable costs of €30, your break-even point will be :

• Break-even = €100,000 / (€50 – €30) = 5,000 units

This means you need to sell 5,000 units to cover your costs. This formula enables you to adjust your strategies: raise prices, lower variable costs, or find ways to reduce your fixed costs in order to improve your performance.

Example: profitability of a subscription campaign

Let’s imagine that a SaaS company launches a marketing campaign with a budget of €50,000, aimed at encouraging prospects to subscribe and become customers.

After several weeks, the results are in: €200,000 in revenues generated, mainly through new subscriptions. The cost of the services provided was €100,000.

Two key indicators stand out:

• Gross margin: (€200,000 – €100,000) / €200,000 = 0.5. Each euro generated leaves €0.50 after covering subscription costs.
• ROI: (€200,000 – €50,000) / €50,000 = 3. Each euro invested in the campaign generated three.

These results show a profitable campaign, with good cost control and a significant return on investment.

LTV/CAC: the key indicator for subscription models

In subscription models, the LTV/CAC ratio is another key profitability indicator. It compares the lifetime value of a customer (LTV) with the cost of acquiring one (CAC).

What is LTV?

According to a Harvard Business Review study, increasing customer retention by just 5% can boost profits by 25% to 95%.

This statistic highlights the importance of Lifetime Value (LTV), which represents the total revenue a company can expect to generate from a customer over the lifetime of the relationship.

For companies based on a subscription model, each subscriber constitutes a recurring and stable revenue stream, making an understanding of LTV particularly relevant.

By assessing LTV, companies can not only measure the long-term profitability of their subscribers, but also optimize their strategies to improve retention and maximize profits.

The basic LTV calculation is as follows:

LTV = Average purchase value × Purchase frequency × Customer lifetime

However, for a more realistic estimate, it is common practice to take into account gross margin (the percentage of revenue remaining after paying direct costs).

Here’s an example to illustrate:

Let’s imagine a subscription platform that charges its customers €30 a month for video streaming services. On average, a subscriber remains loyal to the company for 2 years (i.e. 24 months), and the gross margin on each subscription is 50%.

Calculation of LTV (without margin):

Annual value: €30 × 12 months = €360 per year

Customer lifetime (2 years): €360 × 2 = €720

Thus, one subscriber generates €720 in sales over 2 years.

Application of gross margin :

To obtain the LTV in terms of profit margin, we apply the gross margin to this figure:

LTV with margin: €720 × 50% = €360

This means that each subscriber brings the company an average of €360 in gross margin over the two-year relationship.

What is CAC?

The CAC – Customer Acquisition Cost – covers all costs incurred to attract a new customer, including advertising, marketing and sales efforts.

To guarantee good profitability, it is essential that the Lifetime Valuesignificantly exceeds the CAC. According to Memo Bank, a ratio of 3:1 is considered a good indicator of profitability.

This means that for every euro spent on acquiring a customer, the company generates €3 in revenue over the lifetime of that customer.

Some information to consider about your LTV/CAC ratio

Ratio greater than 3:1: a company generating this type of ratio could consider increasing its acquisition investments to accelerate growth, since it generates sufficient revenue for each customer acquired.

Ratio below 1:1: this ratio is a red flag, indicating that the company is spending more on customer acquisition than it is generating in revenue, which is logically unsustainable in the long term.

Here are a few examples of average ratios for various business sectors:

Our best practices for optimizing your LTV/CAC ratio

To maximize the effectiveness of your customer acquisition investments, it’s essential to adopt strategies that optimize your LTV/CAC ratio.

Here are a few best practices to get you started:

Segmentation: Focus your efforts on the most profitable personas. By identifying the profiles that generate the most value over the long term, you’ll be able to better allocate your marketing resources and improve LTV while reducing CAC.

→ For example, targeting customers with a high probability of retention enables you to optimize your acquisition costs.

Channel optimization: Analyze the performance of different marketing channels. Identify those that generate customers with a high LTV at a reasonable acquisition cost.

Invest more in the most profitable channels, while reducing budgets on those where ROI is low. Use analysis tools to compare acquisition cost and customer lifetime per channel.

Improving the customer journey: Optimizing the customer experience is necessary to increase conversion and LTV while reducing CAC.

→ For example, solutions like SlimPay improve the payment process and subscription management, making it easier to subscribe and boosting customer satisfaction and loyalty.

At the same time, initiatives such as personalizing offers and setting up loyalty programs can also boost customer engagement.

Campaign automation: Use automation tools to better segment, personalize and adjust your marketing campaigns in real time. This improves the effectiveness of actions and reduces operational costs.

Offer personalization: Offering personalized experiences and offers, including cross-sell and upsell, encourages customers to stay longer, increasing their LTV. Loyalty programs and targeted promotions can also boost engagement.

Continuous measurement and fine-tuning: Continuously monitor your LTV/CAC ratio and adjust your strategies accordingly. Regular evaluation enables you to quickly identify areas for improvement and adapt your investments to maximize your ROI.

The art of profitability management

As you’ll have gathered, profitability is more than just a numerical target; it’s the very essence that informs the strategic decisions of any company.

Whether you work in marketing for a subscription-based company or not, mastering performance indicators such as the LTV/CAC ratio is essential for optimizing your resources and ensuring sustainable growth!

By using these metrics, every customer, every campaign and every euro invested is transformed into an opportunity to create long-term value. A well thought-out strategy converts numbers into action levers, facilitating informed decisions and ensuring your company’s continued prosperity.

BONUS FAQ: Frequently asked questions about calculating profitability

How do you calculate an operation’s break-even point?

The break-even point is calculated by dividing fixed costs by the difference between the unit selling price and the unit variable cost.

This formula enables you to determine how many units need to be sold to cover all costs without making a loss or a profit.

How do you calculate profitability?

Calculating profitability involves measuring a company’s ability to generate profits in relation to its costs or investments.

A common method is to calculate gross profitability, by dividing revenues minus costs of goods sold by revenues.

Another approach is to calculate return on investment (ROI), by measuring the gain obtained in relation to the cost of the investment.

These indicators provide an overall view of a company’s financial performance.

What is the formula for calculating profitability?

There are several formulas for assessing the profitability of a marketing operation, each with a specific objective.

Gross profitability evaluates performance by comparing the costs of goods sold with the revenues generated.

Net profitability provides an overall view of profitability, taking into account net profits.

Finally, return on investment measures the efficiency of an investment by comparing the revenues generated with the costs incurred.

Each of these formulas sheds a different light on a company’s overall financial performance.