I just finished reading an article about startup metrics. Original Article
Customer Acquisition Cost (CAC)
- It cost’s money to acquire customers. (WHAT!!!!?)
- A high CAC means you are spending to much to acquire customers.
- To lower it you need to optimize your sign up and landing pages.
- Customer acquisition is important but so is customer retention.
- If you focus to much on customer acquisition and not enough on retention then your customers will leave you.
- It costs more to acquire new customers then it does to keep current customers.
- It’s cheaper to upsell existing customers than it is to sell to new customers.
- There are 3 types of customers (to focus on):
- Current - what can you do to make these customers more satisfied? A good way to find out is to ask.
- Inactive - customers who have stopped using the product or slowed their use should be asked why.
- This is a metric of how many customers stop paying you for your product.
- FACT: You will lose customers. Figure out what a profitable level of loss is for you.
- It’s easier to close with a lost customer than to acquire a new one. Find out why your customers have stopped paying you for your product.
- Conduct as many win/lose interviews with customers who are leaving your product. Pick up the phone, call them!
Life Time Value (LTV)
- LTV is a metric of how much you expect to earn from a customer during the time they are with your company.
- This requires you to know how long most customers will stay with you.
- Then multiply the monthly revenue you expect that customer to give you by the duration they will be with you to get the LTV.
- You should include installation and maintenance expenses of your product.
- A business will fail if the customer acquisition cost (CAC) is higher than the life time value (LTV).
- Aim to recover you customer acquisition cost in less than 12 months.
- CAC should be lower than LTV. A lot lower!
- The speed at which you and your company move and make decisions.
- usually high in early stages of startup. Over time metabolism begins to slow down.
- If you move to fast you create instability. If you move to slow you irritate your customers.
- Ask your customers if you are moving to fast or too slow.
- Measurement of organic growth of your company.
- ways to make your product viral:
- social pushes like share buttons, email invites and promos on twitter or facebook.
Inputs for calculating viral coefficient:
- initial set of customers.
- number of invites sent to each new customer.
- percentage of invites that convert.
The conversion rate over several cycles is your viral coefficient. A positive coefficient means:
- you are giving your customers a positive user experience.
- you have found a good product/market fit.
- you have a lost cost of acquisition.
- you will probably have high profitability.
A way to improve is build incentives into your products.
Are you making money?
- This is the income that your company brings in.
- To increase revenue, focus your efforts on turning “activated” users into paying customers.
This is a measure of the conversion rate from when a visitor becomes an active user. This is signalled by a sign up.
- A high conversion rate means that the visitors had a good first user experience.
- A low activation rate usually means that your product isn’t interesting enough or they find it difficult to get started.
To calculate your referal rate, you need to figure out the percentage of users who come from existing customers.
- A great way to find out is to ask when a user is signing up. “How did you hear about us?”
- A higher referral rate, means a lower customer acquisition cost and your company will be more profitable.