As a startup founder, I know first-hand how many moving parts are involved when it comes to getting a new business up and running. Spreading the word about your new product or service – and getting people to try it – is likely just one of the many hats you’ll have to wear while you’re launching. But if you want to be successful in the long-term, marketers should be sure to monitor these four key metrics from day one: acquisition cost, customer lifetime value, churn rate and average monthly revenue.
Let’s take a look at each metric and see how it fits into your business, regardless of where you are in your company’s or your client’s company’s lifecycle.
1. Customer acquisition cost (CAC)
This is how much it costs you to convince a customer to buy your product or service. This includes all sales and marketing costs, like ads, trade shows, email marketing campaigns and marketing and sales employee salaries. The more you spend to acquire a customer, the longer the payback period before that customer becomes profitable. And if acquisition costs exceed the revenue generated by the client, you actually lose money (Remember the old joke: "I'll sell at a loss but make it up in volume!").
Pro tip: Calculate your CAC by dividing the total acquisition costs by total new customers over a specific time period. For example, let’s say you spent $1000 last month on acquisition efforts and brought in ten new clients. Your CAC is $100.
2. Churn rate (also called attrition rate)
This metric is particularly relevant for subscription or membership-based businesses, but it applies to any business with repeat customers. Churn rate is the number of clients who discontinue their subscription or membership over a certain time period – for instance, the members of a gym who cancel their membership each month. If your growth rate (the rate at which you add new customers) doesn’t exceed your churn rate, your business will shrink. If you find your churn rate is too high, you should determine the root cause (Poor customer service? Inappropriate pricing? Strong competition?) and figure out a way to address it.
Pro tip: You can measure churn rate for both customers and revenue. To calculate customer churn rate, take the number of customers you lose during a particular time and divide it by the total number of customers you had at the beginning of the time period. Revenue churn calculation means taking your monthly recurring revenue (MRR) for a certain time frame and dividing it by the MRR you lost for that same time frame, less any upgrades or new revenue from existing customers.
3. Average net revenue per customer
This is a core operating metric for businesses with recurring customers. This number reflects the average recurring revenue generated by customers each month less the costs to serve them (customer support costs, etc). Tracking the average net revenue per customer provides visibility into the monthly cash flow from each customer and can ultimately be used to help understand what each customer is worth over the duration of their relationship with your business (aka their customer lifetime value, see below).
Pro tip: Track the monthly profit per customer by customer cohort (customers acquired in different time periods) to see if the average revenue generated by clients changes throughout their relationship with your business.
4. Customer lifetime value (CLV)
This is the value a customer contributes to your business over the lifetime of your company. In other words, CLV is the dollar value of each customer based on the projected cash flow generated by the relationship over time. Your CLV is a function of the average net revenue they generate each month and how long they typically remain customers (which is driven by your churn rate). The most successful businesses are those with high average net revenue per customer and low monthly churn rates. CLV can give you a sense of who your “best” customers are (e.g. ones that don’t leave after a few months) so you can focus your marketing efforts there.
Pro tip: It’s important to understand the relationship between your customer acquisition costs and your customer lifetime value. For example, if your acquisition costs exceed your CLV, your business won’t be profitable and you'll need to either lower your CAC or improve monthly revenue or churn.
Understanding your or your client’s financial information can initally seem like a daunting task. But acquiring and keeping customers is what will ultimately keep you in business, so it’s important to really get your head around the numbers. In the same way a marketer looks at open and click-through rates for email campaigns, tracks web traffic via Google Analytics and monitors other key metrics related to their marketing efforts, having a solid understanding of the metrics around your money is key to growing and running a successful business.
Jon Zimmerman is the CEO and co-founder of Front Desk, a rapidly growing mobile-first, software-as-a-service (SaaS) platform that provides cloud-based business management tools to the personal services economy. Learn more about Emma's integration with Front Desk.