The subscription revenue model
A subscription charges a recurring fee for ongoing access, independent of how much the product is actually used. It is prized for predictability — but that predictability lives or dies on one number: churn.
The basics
Predictable, recurring revenue
Subscription revenue is easier to forecast than one-off sales, which is why investors often value subscription businesses on multiples of annual recurring revenue (ARR) rather than trailing sales.
MRR and ARR
Monthly recurring revenue (MRR) and its annualized version (ARR) are the standard ways subscription businesses report size and growth — see our glossary for related terms.
Churn is the central risk
The percentage of subscribers who cancel each month determines how much new revenue is needed just to stand still — see the worked example below for how quickly this compounds.
A worked example: churn compounding over a year
Two otherwise identical businesses start with $100,000 MRR and add no new customers for 12 months — one with 2% monthly churn, one with 8%.
| 2% monthly churn | 8% monthly churn | |
|---|---|---|
| MRR after 6 months | ≈$88,600 | ≈$60,700 |
| MRR after 12 months | ≈$78,500 | ≈$36,800 |
Illustrative, assuming no new customers added — in practice, new sales offset some churn, but this shows why even a few extra points of monthly churn compound into a very different business over a year.
What to check before investing
Ask for monthly (or annual) churn specifically, not just growth rate — a company can show impressive top-line growth from new sales while quietly leaking a large share of existing customers, a pattern that eventually catches up with growth.
Net revenue retention (which nets churn against expansion revenue from existing customers upgrading or buying more) is often more informative than churn alone — see our SaaS sector guide for how this metric is used in practice.