Most KPIs become common sense, once you understand the underlying measures. I want to introduce two important measures that are often ignored by companies. The first measure is: Cost to acquire customers (CAC). To calculate CAC, consider and capture all of costs (Lead generation, Marketing, Sales, Partnerships, Support staff) required to capture a customer. If this proves to be too cumbersome, create a baseline estimate. We can help you derive this just call us.
The second measure to consider is lifetime value (LTV) of your customers. This number may be significantly different per customer based on your business, take the average to set the baseline estimate.
Once you have CAC and LTV values, a simple calculation of LTV/CAC will give you great insight into the profit ($ Returned) per sales effort ($ Invested). The higher the number, the more attractive your business because each $ invested yield higher $ returned. For example, if it costs $10,000 to sign on a customer, and the customer relationship can yield $150,000 over the life of the relationship, the ratio is $150,000 / $10,000 = 15. For each $1 you invest you will yield $15 back to your business.
On the negative side, if you are an ecommerce start-up and it costs $250 to sign on a customer, and the customer relationship can yield $150 over the life of the relationship, the ratio is $150 / $250 = 0.6 (Anything less than 1 is operating at a loss). For each $1 you invest you will yield $.60 back to your business. You may know some classic Internet flame-outs with this type of ratios.
Why it's important: Measuring this ratio can help you determine projected profit and loss with a fair level of confidence, versus the method of adding or subtracting a certain percent based on historical performance. You can also embark on campaigns to (1) Lower your CAC, and (2) Increase you LTV over time.
What to do next: Ensure you are aware of the cost elements required to sign on a customer, and start to measure the lifetime value of each customer type. Remember a ratio less than 1 is indicative of a projected loss. You can contact Lee Tsao (KPI Crusader) at ltsao@biztech.com and I am happy to explore this with you further. Until next time, keep up the KPI crusade!
