In this post, we discuss three objective indicators to measure your start-ups’ success. These are all costumer-based in terms of acquisition and retention, which are ultimately the main KPIs to ensure a solid and well-balanced business model. We’re specifically talking about the CAC, the churn and the LTV.
- The CAC stands for “customer acquisition cost”; that is, the economical effort dedicated to owning a new client. Such amount can be calculated with a simple formula by dividing the sum of all sales-oriented expenses by the number of new costumers achieved with those. The major hardship in this calculation is discerning the funnel between offline and online channels. Whereas in digital marketing, the conversion rate is easily trackable and countable, offline campaigns are much more ambiguous. Our recommendation is to have a clear threshold of regular conversion to easily associate sales peaks with certain actions.
- The churn stands for the client cancellation rate, meaning what percentage of customers ceases to use your services in a set amount of time. It is easily calculated by dividing the total base of users against the amount lost. Determining the churn rate is a necessary step to find out the customer lifetime (how long do users stick to your service on average). This value is the result of dividing 1 by the churn rate for a certain time gap. Eg. A monthly churn rate of 3 % results in a customer lifetime of 33 months (1/0.33).
- The LTV or “lifetime value” refers to the average income generated by users during their relationship with your product. The LTV consists of two criteria: average revenue per account (ARPA) and customer lifetime, which we’ve addressed in the above point. By multiplying these two, you will know the value you get per each user.
To sum up, while the CAC refers to costs, the LTV is linked to revenue. Therefore, a successful business model should show lower rates on the first and higher values on the second. This can be achieved by inbound marketing, freemium accounts or strategic partnerships amongst other strategies on the one hand and scalable pricing, cross-sell or lead generation for 3rd parties on the other hand, to set a few examples.
If you’d like to learn more about the success formula for business models, stay tuned to the blog for more upcoming insights.