Product Sense · medium · Reported at Netflix
How would you measure the health of a subscription business?
Asked in BI Developer interviews.
Short answer
MRR, churn, LTV/CAC, activation, engagement cohorts, retention curves.
How to answer it
The frame
No single number describes it. A subscription business is healthy when it acquires efficiently, retains what it acquires, and grows the accounts it keeps. Group the metrics that way and the answer stays organized.
The metrics, defined
MRR / ARR monthly or annual recurring revenue. Contracted,
repeating revenue only, excluding one-off fees
Gross revenue revenue retained from existing customers, before
retention (GRR) upsell. Cannot exceed 100%. Measures leakage
Net revenue after expansion. CAN exceed 100%, and above 100%
retention (NRR) means the base grows with zero new customers.
The single best headline for a B2B business
Logo churn share of CUSTOMERS lost
Revenue churn share of REVENUE lost. Diverges from logo churn when
churners are unusually small or large
CAC fully loaded cost to acquire a customer
CAC payback months of gross margin to repay CAC. Under 12 is
strong, over 24 is a funding problem
LTV / CAC lifetime value over acquisition cost. 3x is the
usual benchmark
Quick ratio (new + expansion) / (contraction + churn).
Growth efficiency in one numberHow to read them together
- High growth with NRR under 100% is a leaking bucket: acquisition is masking retention, and it stops working the moment marketing spend pauses.
- Low logo churn with high revenue churn means you are losing your largest accounts, which is far more serious than the customer count suggests.
- Good LTV/CAC with a long CAC payback is a cash-flow problem even though the unit economics look fine.
That last distinction, between a profitable customer and an affordable one, is what separates a real answer from a list.
Watch the cohorts, not the totals
Aggregate MRR hides everything. Retention by signup cohort shows whether the product is getting better or worse, because a fast-growing company can have worsening retention and rising total revenue at the same time for quite a while.
Key points
- Acquisition, retention and expansion. Group the metrics and the story is clearer.
- NRR is the headline for B2B: above 100% means the base grows on its own.
- Logo churn and revenue churn diverging tells you which accounts you lose.
- CAC payback is a cash question; LTV/CAC is a profitability question. Both matter.
- Read cohorts, since totals hide a worsening product behind growth.
FAQ
- Which single metric if forced? NRR for B2B, and retention by cohort for consumer.
- How is LTV calculated? Gross margin per customer divided by churn rate, and it is unreliable early because the churn estimate is unreliable.
- What about engagement? A leading indicator: it falls before churn shows up in revenue, which makes it useful for prediction rather than reporting.
The 30-second answer
I would group it into acquisition, retention and expansion rather than reach for one number.
On retention I would lead with net revenue retention, because above a hundred percent means the existing base grows without a single new customer, and put gross revenue retention next to it to separate leakage from upsell. I would also compare logo churn with revenue churn, because if revenue churn is much higher we are losing our biggest accounts.
On acquisition, CAC payback in months and LTV over CAC, and I would distinguish them: payback is a cash-flow question and LTV over CAC is a profitability one, so a business can look fine on one and be in trouble on the other.
And I would read all of it by cohort, because total MRR can rise while retention gets worse.
In the interview
- What they are checking: the MRR decomposition and the difference between lagging and leading metrics.
- Common mistake: reporting total MRR and total subscribers with no churn split, which hides exactly the thing the question is about.