Saas companies, subscription business models, e-commerce sites and much more will likely have hundreds if not thousands of different metrics they can track and mesure. But you don't want to hassle with all these metrics until you have to. Instead, it's worth it to
Every business wants to acquire new customers, retain those customers and continually generate increasing revenue from existing customers. But these business models are unique in that customers typically pay over an extended period of time, through a monthly subscription. And depending on what the average cost to acquire a new customer is, a good breakeven target is 12 months.
Whether your customer has to keep your software for 12 months or comeback and purchase 6 times before you break even, you still spend the cash to acquire them and now you need to retain them.
Inbound marketing is big contributing factor to each of the following metrics. Inbound marketing helps to populate your lead funnel with higher quality contacts and tends to keep marketing expenditures under control.
This helps drive your customer acquisition costs. Inbound marketing also influences your customers expeirence. Implementing inbound marketing and sales practices can make for a better expeirence and lower customer churn.
It tends to lower the barrier for transparent communication with customers. This will help to increase your lifetime value and ultimately your CAC ratio.
Each of the following metrics either influences or is influenced by another. This allows you to keep these important inbound marketing and sales metrics top of mind.
Below are three important metrics where inbound marketing and sales are used to drive positive growth. We have a free cheat that explains, in detail, the most important marketing and sales metrics. Download it here and follow along.
Customer Acquisition Cost
Customer acquisiton costs helps to answer the question: "Are we effeciently spending money on acquiring new customers?"
Customer acquisiton costs are important for every business to pay attention to. How much money are you spending for every new customer? Overtime your customer acquisition cost per customer should go down as you get more effeicent.
The idea is to keep this number well below the value of that customer over time. Where customer acquisiton cost becomes much more ciritical is in a subscription business business such as a software as a service company.
You may spend $1000 in marketing and sales to acquire every new customer and the customer pays $50/month for the software. So in this example (assuming your customer pay you monthly), you would have to retain a customer for more than 20 months to breakeven. Anything else than 20 months and you lose money. More on this later.
Here is a great article by David Skok where he proposes that another crital factor to growth is the business model itself or how customers are acquired. Along with product-market fit and a good team.
David shows that when a company, even one that has found a great product-market fit, hasn't figured out a way to acquire customers at a low enough cost they fail.
A few things to consider when determining your customer acquisition cost is how much is it going to cost you convert leads. This could be done by spending in places like google ads, SEO, Blogging, Social Media...
Then you need to take into consideration your conversion rates. Can you optimze the landing page your google ad points to to convert more prospects? Can you tweak your google ad to better target your audience? And so on.
Finally you need to think about the amount of sales involved in the product. Does your google ad link to a free trial sign up page? Does a sales rep need to get involved to close once the free trial ends? If they do get involved do your close rates increase?
There is a lot of different things you can do to tweak these results and lower your CAC. The most important part is to know exactly where and how these dollars are being spent so you can close the loop from marketing and sales to consistently refine your process.
LTV:CAC (lifetime value compared to customer acquisition cost)
Lifetime value compared to customer acquisition helps to answer the question: "How much are we paying for every dollar of annual reocurring revenue?"
LTV:CAC has been touted as the holy grail of Saas metrics and for good reason. It encompasses a lot of information into a single metric to provide a detailed overview at a glance.
David Kellogg has a great post on LTV:CAC where he too describes LTV:CAC as the metric to watch if you had to pick only one.
Why? "Because what you pay for something should be a function of what it's worth."
Lifetime value calculates what a customer is worth. There are many ways to calculate lifetime value. I like to calculate it with gross margin instead of revenue to get a more realistic perspective of the customers value because we are already taking the cost of goods/service into consideration.
Time to Payback CAC
Time to payback CAC helps you to answer the question: "How fast are we breaking even on our customer acquistion costs?"
Just like CAC ratio we discussed above, time to payback CAC is another important metric to keep an eye on. It's pretty obvious why it would be important to know how long it is going to take to make your money back on on customers.
Afterall, businesses are in business to make money. So when they spend money they want to know how long it will take to get back. A good benchmark/target is 12 months. This gives you enough time to really wow the customer and become profitable.
To find out how long it takes to payback your acquisition costs, divide your CAC (customer acquisition costs) by gross margin-adjusted MRR - MRR (monthly recurring revenue) per customer multiplied by gross margin.
Now that you have an overview of three important inbound metrics, how should you start implementing them? First things first, you want to calculate each of these metrics now to set a baseline moving forward. This will help you get a sense of how these numbers are trending over time.
Second you need to make it easy to record these numbers and set up a process so that you are collecting the data on the same frequency (every day, every M W F, once a week?) and reporting on a consistent schedule. This makes it that much easier to know the numbers and dicuss the results.
Each of these metrics has a sweet spot that you'll need to figure out for your company specifically. If you customer acquisiton costs are too low you could be missing out on a lot of revenue and future value, if your lifetime value is pretty close to you acquisition costs you may need to invest more in your service delivery in the form of customer support to help retian customers longer. And if your payback period is less than 12 months you may want to consider ramping up acquisition spend to acquire mosr customers at this benchmark.
Its fun to start disecting your inbound efforts this way to see the true effect your marketing and sales is having on your most important metrics.
Always remember that these metrics are only ever as good as the data feeding them. They will help to bring the rest of your numbers into context. For example, if your acquisition cost is getting high you can dive into marketing and sales spend to see where there are ineffeiciencies or over spending or unproductive people.
Download this free cheatsheet which explains the most important inbound marketing and sales metrics and shows you how to calculate each one.
If you have any question or want an explain on any other metrics let me know in the comments below or dropo me a note on twitter @daivdalberico