CFOs adopting subscription-based models may need to sign up for a new set of key performance indicators (KPIs) to demonstrate the strength of their recurring customer base. Subscription-based plans have gained wide popularity as CFOs worldwide are looking for a more consistent relationship with customers. Selecting the right subscription KPIs, definitions and tracking methods that align with the company’s business model and growth story is imperative for CFOs looking to drive shareholder value, optimize operations, oversee their companies’ changing financial landscape and make effective decisions.

While this need for such metrics is well known, businesses often struggle to select the correct KPIs.

The right KPIs, when properly aligned with strategy and woven into forecasting, scenario and capital planning, can give CFOs greater insight about adopting new models and making strategic investment decisions on capital and operating expenditures across the organization. This comprehensive approach can enable companies to perform regular scenario planning around product performance and customer data.

Subscription KPIs are unaudited, and there are no regulations or consistent definitions across industry participants. Additionally, the business model and industry will affect which KPIs are selected. Appropriate KPIs can also vary based on such factors as whether a capability being measured is cloud based, hybrid cloud or on premises. Differences among products and business lines, especially for acquired businesses, can also affect KPI choices. Even software companies that utilize the same subscription KPIs can define or track them differently, leading to varying outcomes.

Regardless of origin or definition, KPIs are most useful when they are aligned with company goals and strategy, applied consistently across business functions and incorporated into forecasting and scenario planning.

Zeroing in on the right KPIs

While more commonly used subscription KPIs, such as customer churn rate, customer acquisition rate, retention and monthly recurring revenue, were useful to many companies looking to represent a growing subscriber base, businesses should reexamine their KPIs amid rapid market changes, as functions and models change, during M&A activity and other major benchmarks. KPIs, along with their definitions and methods, should be tweaked, changed or abandoned according to your company’s needs.

For KPIs that effectively inform investors and show subscription strength, ask these five questions:

1. Are we selecting the right KPIs that align with our company’s operating model? KPIs are not one size fits all. Carefully consider your selection and definitions of KPIs you adopt and confirm that they align to your strategy. Perform an eight-quarter back test of the implications of different definitions before deciding which to add.

2. Can our KPIs be operationalized? Make sure the KPIs are seamlessly integrated into your strategy, forecasting and operations. It is imperative that your KPIs can be measured and used in operational decision-making.

3. Are the KPIs consistently measured across each area of our business? No matter your company’s choice of KPIs, improper definitions or inconsistent performance tracking can lead employees to “game the system” for favorable statistical yields. It is important to understand these trade-offs during the design phase to verify consistency and accuracy while monitoring performance.

4. How will we ensure KPI accuracy if our strategy, structure or investments change? New products, M&A and business model changes are the best times to reexamine your KPI definitions and tracking methods to confirm seamless integration. If business changes make an old metric unnecessary, find alternatives that support the long-term strategy and show shareholders how value is being created.

5. Did we select relevant KPIs that effectively communicate our story? Investors demand transparency, so make sure your KPIs and definitions are prepared for scrutiny. Understanding the potential implications at the onset can help mitigate potential losses in shareholder value from the optics of metrics that can be misconstrued or misinterpreted.

When sales and marketing and R&D effectiveness KPIs are included in the regular monitoring process, CFOs have greater transparency to make strategic investment decisions on capital and operating expenditures across the organization and for communicating performance to their board and investors.

No matter your company’s choice of KPIs, improper definitions or inconsistent performance tracking can lead employees to “game the system” for favorable statistical results. It is important to understand these trade-offs during the design phase to verify consistency and accuracy while monitoring performance.

For more resources and guidance on corporate finance strategy, visit EY Corporate finance consulting.

Ryan Citro and Max Bulger are principals and Benjamin Thiesen is a partner in Strategy and Transactions at Ernst & Young LLP.

The views reflected in this article are the views of the authors and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.