As a start-up, your focus is mainly on the bottom line. But as your business grows and evolves, a look at some key performance and financial metrics is warranted. Here are some critical metrics to track.
Customer acquisition cost (CAC)
The cost of acquiring a new customer includes everything from the cost of goods sold (COGS) to indirect inputs such as marketing, rent, and payroll. To calculate CAC, divide total costs over a specific time frame by the number of customers gained during that time. Generally speaking, the lower your CAC the better.
Customer lifetime value (CLV)
The measures the revenue you receive from repeat customers and can help you determine how much to expend on CAC. You can extrapolate CLV from what you know about customers’ shopping behaviors, including the dollar value of their average purchase and purchase frequency.
Retention rate and churn rate
Are the measures of the percentage of customers that stay or leave, respectively, over a given time period. This is particularly relevant for service businesses and subscription model enterprises. If you have 100 customers at the start of the month and 95 at the end, your churn rate is 5 percent. Generally, the goal is to keep your retention rate high and your churn rate low, although these metrics should be evaluated in combination with each customer’s CLV.
Return on Advertising Spending (ROAS)
is a calculation of the return generated by paid ad spending. Simply divide the sales generated by the amount spent on advertising and promotions.
This refers to the difference between revenue and expenses. To be cash-flow positive, or “in the black,” your revenue must exceed your cost of goods sold and your total operating expenses.
Whether you are just starting out or your business is in an expansion phase, it’s important to know what to measure and how to calculate, track, and use these key metrics to improve your business.