The Essential Guide to Business Metrics
Whether you’re a SaaS-style startup pursuing a valuation or an enterprise-level technology vendor launching a new product, you must monitor, measure, and manage every effort. Why? Because data is proof, and to justify anything your company does—whether that’s to a venture capital firm, the board, or simply the person signing the checks—you have to have proof that it works. So, what should you be monitoring, measuring, and managing from a company-wide perspective?
What is Lifetime Value (LTV)?
In the simplest form, LTV is the cost of your product or service multiplied by the average amount of time you can sell that product or service to a customer. ConversionXL shares the following formula: “(Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years).”
LTV is most relevant to subscription-based or recurring revenue businesses, which focus on land-and-expand models (i.e., obtain a customer and then move that customer into higher-tier packages or bolt on additional products and services to the account), because these types of businesses can easily track when they gain and lose customers and how much money those customers spend on a recurring basis. But all businesses care—or should care—about customer retention; thus, LTV becomes a relevant metric for any type of company that collects customer loyalty and purchasing data. Case in point: Starbucks. Check out this LTV infographic from KissMetrics on the coffee titan.
The higher the LTV, the better—which means businesses must actively find ways to increase sales, transaction volume, and retention. Gainsight can actually help with all of those. Click here to find out how.
What is Customer Acquisition Cost (CAC)?
To put it plainly, this metric is the amount of money it costs you to obtain a new customer. To calculate CAC, you’ll need to know a few things about spend, specifically how much your company throws down for sales, marketing, and onboarding efforts, including labor. You’ll then divide that amount by the number of new customers. Thus, you need to frame this calculation using a specific time interval (e.g., monthly, quarterly, or yearly). The lower the CAC, the better—which means businesses must constantly consider how to improve efficiencies while increasing leads.
What is Churn?
Churn is the percentage of customers lost over a certain period of time, and it’s typically a strong indicator of rising CAC and tumbling LTV. If a business has a great deal of churn, it most likely has a fundamental issue with its product or service. Thus, optimizing sales and marketing efforts isn’t the answer to correcting churn. Instead, it’s fixing what, specifically, you’re trying to market or sell. Click here to learn more about churn, including specific strategies on how to stop a creeping (or galloping) churn in its tracks.
What is Net Promoter Score (NPS)?
Established by Bain & Company in 2003 to help companies measure and evaluate customer loyalty, Net Promoter Score (NPS) serves as a strong alternative to the long-form customer surveys of yesteryear, because NPS focuses on one simple question: How likely are you to recommend this company/product/service to a friend or colleague? Customers answer the question by selecting a number on a one to ten scale, with 0 being not at all likely and 10 being extremely likely. These responses are then classified into three distinct categories:
- Promoters: Responses from 9-10
- Passives: Responses from 7-8
- Detractors: Responses from 0 to 6
A company establishes its NPS by subtracting the percentage of detractors from the percentage of promoters. (As the name implies, passives are removed from the calculation.) Scores can range from -100 (all detractors) to +100 (all promoters). Generally, scores greater than 0 are considered good and scores greater than +50 are considered excellent.
Companies are often encouraged to include follow-up questions as well. These questions are often open-ended and encourage consumers to elaborate on the score they submitted. These responses allow companies to better understand the customer as well as the overall metrics. They also provide companies the opportunity to create actionable plans to increase customer satisfaction as well as optimize financial benefits.
Does my business need NPS?
Unlike CAC, churn, and LTV, NPS is not a metric you can calculate based on basic business data. You need to do extra work to calculate NPS; specifically, you must administer an NPS survey to your customers on a regular (e.g., quarterly or biannual) basis. The extra work that NPS requires is worth it, though. Here’s why:
NPS allows you to evaluate and build a loyal customer base.
Loyalty is one factor that generally correlates with profitability and sales. NPS is a system that allows companies to link metrics in customer loyalty to actual business outcomes. By using NPS, you can get a glimpse into your customers’ future—what they’re going to do, not what they’ve already done. With NPS, your business gets a simple, easy-to-understand score to track customer loyalty over time.
NPS enables you to create more customer advocates.
Bain & Company data showed that promoters (those that scored 9 or 10) account for more than 80% of referrals in most businesses. Using NPS allows companies to determine who the promoters are and how many are gained versus lost. This information allows companies to leverage customer advocates to spread positive word-of-mouth and send referral leads.
NPS helps you drive revenue growth and boost lifetime value.
Developing and implementing an NPS isn’t just about determining how many loyal customers you have; it’s about using that data to grow your business. Promoters are not only advocates for your business, but they also have a higher LTV. They are less price-sensitive and spend more than detractors. Promoters also tend to cost less in regards to marketing, which can lower CAC.
How do I implement an NPS survey?
Most businesses administer NPS surveys via email, at checkout, or at the point the customer accesses the software or application. That’s the easy part. It’s what you do with the data that’s tricky. Any business can use a survey tool to survey its customers. Individuals must then export the survey results to calculate the actual net promoter score. For this reason, many businesses consider NPS tools, but that’s also problematic, because while it automates the NPS administration and calculation aspects, the results aren’t inherently tied to the rest of your business’s metrics. Thus, when incorporating NPS into your business, look for a tool that integrates with your CRM software. Or even better, look for a Customer Success solution that features an NPS tool, because then you’re able to understand NPS as it relates to all customer behavior.
How Do I Improve my LTV, CAC, Churn Rate, and NPS?
The key to a successful business is having a high LTV, low CAC, minimal churn, and positive NPS. On paper, that seems simple enough, but in reality, it’s incredibly difficult. There are a wealth of strategies on how to improve these metrics, including:
- implementing upsell and cross-sell strategies,
- instituting referral programs,
- segmenting customers to better market and communicate,
- improving customer service experiences, and
- collecting customer feedback and using that intel to enhance your products and services.
However, all of these efforts actually roll up to a larger, all-encompassing business initiative: Customer Success. The premise is simple: help customers be successful at using your product or service, and you’ll be successful, too. Thus, incorporating a Customer Success solution (which includes both a business model and software) into your organization will ensure you tackle all of the above strategies and more from every possible angle. More importantly, thanks to data science, you’ll not only always know your LTV, CAC, churn rate, and NPS, but you’ll also know when they’re on the verge of changing adversely. Thus, your business is never reacting to negative trending metrics, but instead is stopping them from going negative in the first place. Furthermore, the Customer Success software can provide perfectly timed advice and instructions on how to execute the above strategies. Talk about a genuine business partner. To learn more about Customer Success solutions, see data science in action, and discover just how positively Customer Success can impact your business metrics, click here.