Do you know these key customer metrics and how to improve them for your start-up?

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June 14, 2023

Do you know these key customer metrics and how to improve them for your start-up?

There are quite a few metrics around, aren’t there? Especially if you’re a high growth startup.

If you’ve ever wondered how to interpret LTV/CAC ratio, I promise you, you aren’t alone.

But you will need to know your metrics to understand the performance of your startup, so that you may then begin to improve. With practice and exposure, you will grow familiar with them.

Here is a straightforward breakdown of how to calculate, interpret and improve key customer metrics.

Customer Acquisition Cost (CAC)

This is how much it costs you to acquire your customers. Simply divide what your sales and marketing spend is by the number of new customers you acquired in a given period. Easy!

But we’re not done yet.

If we’re looking to measure the true cost of getting revenue, this should also include the cost of providing the product. For some businesses, this may mean including the Cost of GoodsSold. For SaaS businesses, you may wish to examine your marginal technology related costs.

Use caution when interpreting CACon its own. The meaning of CAC is ultimately relative to the value of your sales.

Spending more can make sense to get bigger sales.

But how do you lower CAC?

Encourage referrals from existing customers and prioritise organic marketing.

Referrals from your existing customers are a potent and low-cost tool to acquire new customers. You may offer a ‘refer a friend’ button. You may even offer incentives to your customers for referrals, which can mean credits, discounts or even new features.

Social media, email marketing, referral marketing and Search Engine Optimisation can together generate a large share of your customer pipeline at low cost.

You may also wish to simplify your sales and onboarding process to tighten your sales funnel.

Here are some resources from Shopify you may find helpful.

Customer Lifetime Value (LTV)

This is how much money you expect to make from your customers on average over their time with you. The calculation of this will differ depending on your business model.

If you are a subscription-based SaaS, you may wish to multiply your average monthly revenue across your customers by your expected customer lifetime.

How do you calculate expected customer lifetime?

It is 1 divided by your monthly churn rate. That will give you the number of months your customer is expected to stay.

Here is an example.

Your customer churn rate is 1% on a monthly basis. What is your LTV?

1 / 0.01 = 100. What does this mean?

If your monthly churn rate is 1%, your customers are on average, expected to stay for 100 months, or around 8 years.

But what can you do once you have your Customer Lifetime Value?

Compare it with how much you spend to get your customers. More on this later.

Group customers by sales channel and compare where the highest lifetime value customers come from.

Study the behaviour of you high lifetime value customers and get to know them.

But then, how do you grow your customer lifetime value?

Here are some suggestions:

Strategically offer special treatment to your most loyal customers
Interview your best customers and ask them why they like your product so much
Consider creating a rewards program
Offer gifts occasionally to build brand loyalty
Run exclusive deals only for existing customers.
Stay in touch with your long-time customers

LTV/CAC Ratio

This is just your Customer Lifetime Value divided by your Customer Acquisition Cost.

What does this tell you?

How much revenue can you expect to get back from every dollar invested in sales and marketing. And you need to know whether you are overpaying or underpaying for new customers.

So, how much revenue should I aim to get from every dollar spent on CAC?

According to Airwallex, 3 is a good target for companies with recurring revenue models. If you are an early stage company, and still experimenting to find the ideal sales and marketing strategy, you may be comfortable with a higher figure.

So, what can you do if you don’t meet the mark?

Reduce your CAC or grow your LTV.

Customer Churn

This represents the rate at which you customers leave. Divide the number of customers lost over a period by how many customers you had at the start.

You may wish to do this on a monthly or annual basis.

You will need this to calculateCustomer Lifetime Value.

You may also wish to calculate revenue churn, which is lost account revenue divided by total revenue at the start of the period.

Be aware that revenue churn and customer churn can be different figures. If you have differing billing plans and tiers, not all customers have the same value and therefore the value of the customers lost can impact the severity of the revenue churn.

So, what do you do if churn is a problem?

Here are some suggestions:

Interview the customers that have left
Provide supporting resources and education on your product
Confirm that you’re targeting customers most aligned with your offer
Learn what the signs are that a customer is about to leave and maybe offer some support to keep them on

Customer Retention Rate

This is what percentage of your customers you retain over the period. Subtract the customer churn rate from 1 to calculate the retention rate.

You may also wish to calculate revenue retention, just subtract the revenue churn rate from 1 instead.

As with churn rates, revenue retention may not match up with customer retention if customers have different values.

It is much cheaper to keep existing customers than it is to convert leads into new customers, so retention plays a very important role in cost-effective revenue performance.

So, what do you do if you have a retention issue?

Here are some ways you can improve your customer retention:

Manage expectations from the start and overdeliver
Notify your customers when the invoice is coming due
Set strong customer service KPIs
Maintain a brand-authentic social media presence
Use customer feedback surveys on thank you pages, emails and social media

In Conclusion

A few things to think about, aren’t there?

Ultimately, you want to build strong relationships with aligned customers and there are a ton of strategies to do that.

If you can get your go-to-market approach right, this can translate into improved growth potential and profitability of your business.

And that sounds more investible, doesn’t it?

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About the author

I’m Dylan. I help coach growing companies in capital raising. I advise founders from the more technical elements, like data room preparation and financial modelling, to helping them refine their pitch with storytelling. I also make introductions to my network of early-stage tech investors. If you’re looking for capital raising support, reach out to me on LinkedIn or at dylan.taylor.butler@gmail.com