November 10, 2021
6 Min Read
One of the keys to sustainable growth is, simply, knowing your numbers. If you’ve got a handle on what’s working (and what’s not), you can prioritise your to-do list and make data-driven decisions to scale your business.
However, with so much data available, it can be tough to know which metrics really matter. And without that insight, you can fall into the trap of focusing on vanity metrics — those numbers that look good on the surface, but do little to move the needle.
To avoid that, we’ve put together this short guide to the six essential growth metrics you should be tracking. Understanding these will make sure you’re on the right track towards real revenue growth.
You can track these numbers weekly, monthly, quarterly, or even yearly, and they’ll all give you a good indication of the health and performance of your business.
Customer acquisition cost is your best estimate of the total cost of acquiring a new customer.
To calculate your CAC, use the formula:
Total amount spent on sales and marketing / Number of new customers acquired = CAC
To get the most accurate picture of your CAC, make sure to include all of your sales and marketing expenses (not just costs of paid ads) and only count customers who are paying you (not free trial users, for example).
You can use your CAC figure for a variety of use cases.
Firstly, it indicates if you’re acquiring customers at a rate you can afford. The lower your CAC, the more customers you can acquire on a smaller budget.
For most startups, CAC will be high at first, as you don’t have the benefit of brand recognition. Over time, it will reduce, as your company becomes more well known. After several years, you can expect your CAC to start increasing as you begin to exhaust the channels in which you’re marketing.
LTV shows you how much a customer is worth to your business by looking at the revenue they generate for you while they’re a customer.
The Customer Lifetime Value formula varies depending on your business model. However, for SaaS companies, it’s calculated like this:
Average Revenue Per User (ARPU) * Average Customer Lifespan (in months or years) = LTV
Make sure you use ARPU and average customer lifespan figures over the same timeframe.
LTV is a handy metric as it shows you how much revenue the average customer or user generates for you. You can then work backwards from that figure to calculate how much you can afford to spend to acquire new customers.
For example, if your LTV is £1,000, you know you can’t spend more than that to acquire a customer without making a loss.
To get the most use out of your LTV figure, you can use it in combination with your CAC to find your LTV:CAC ratio, which we’ll look at in more detail next.
LTV:CAC ratio looks at your LTV and CAC in conjunction. In simple terms, it tells you if you’re acquiring customers at a cost that you can afford and how large your profit margins on those customer acquisition efforts are.
To calculate LTV:CAC, use the formula:
Customer Lifetime Value / Customer Acquisition Costs = LTV:CAC
Knowing your LTV:CAC helps you make better decisions. Here’s an example:
Let’s say you spend £20 to acquire a customer. The average customer spends £60 with your business over their lifetime. That means your LTV:CAC is 60:20, or 3:1.
With an LTV:CAC ratio of 3:1, you’re acquiring customers profitably. On the other hand, if you were spending £40 to acquire a customer, that would be a 1.5:1 ratio. Your profit margins on those customers would be too low to be sustainable in the long run, so you’d need to find ways to reduce your CAC or encourage customers to spend more and boost your LTV.
In general, an LTV:CAC ratio of 3:1 is a good benchmark.
Keeping your churn low is vital for sustainable growth. If your churn gets too high, you’ll be losing customers faster than you can acquire them, and growth will stall. Keeping tabs on it helps you to take proactive action to reduce it. It’s most useful for businesses billing on a recurring subscription basis, either monthly, quarterly, or annually.
There are different ways to calculate churn, but the most common version is:
Total number of churned customers over a period / Total number of customers = Churn rate
Churn becomes more valuable the larger your company grows, and it’s an excellent metric to evaluate how much your customers value your product/service.
If you have high churn, it could signify:
From there, you can experiment with new marketing, new product features, or new customer support initiatives to ensure every customer is getting as much value from your product/service as possible.
No company can ever remove churn, but by measuring it, you can see how it affects your growth and find strategies to tackle it.
MRR and ARR are two valuable metrics to gauge the overall health of your company and visualise your growth rate.
To calculate MRR, use the formula:
Total number of paying customers per month * Average revenue per customer = MRR
You should only include revenue that’s billed on a subscription basis. For example, if you charge £200 per month for a subscription but also have a £500 one-time setup fee for new customers, you shouldn’t include the one-time setup fee in your MRR calculations.
It’s also useful to extrapolate your MRR into ARR to see how you’re doing on an annual basis. There are two ways to do this. Firstly, if you’re billing customers on a monthly subscription, you can simply do:
Monthly Recurring Revenue * 12 = ARR
If you’re billing customers on annual contracts you could also choose to only include subscriptions that are billed annually and exclude anyone on a monthly plan.
MRR and ARR are valuable because of the word ‘recurring’. It’s revenue you can expect to repeat and have in the next period.
If your MRR/ARR is growing, you can hire new team members, launch new marketing campaigns, and accurately forecast how much revenue your company will generate over a defined period.
Just because a potential customer signs up to your product or visits your website, it doesn’t guarantee they’ll understand the value you’re offering. A key metric to measure if you need to ensure you’re providing value to your customers is your Activation Rate.
What exactly does “activation” mean here? Well, it’s the moment your customers experience the value of your product/service, leading them to stick around with you for longer.
For an email marketing software company, this could be: “User sends first email campaign”.
For an eCommerce company, it could be: “Customer buys a second item”.
Your activation moment will differ depending on your business and product/service. However, the key is that it’s closely related to the moment you know a customer sees the true value of your product/service — meaning they’re going to remain a customer.
To track how effectively you’re helping customers get to this moment, you need to measure your Activation Rate.
To calculate your Activation Rate, use the formula:
(Activated Users during a time period / All Users in same period) * 100 = Activation Rate
If you acquired 1500 users and 1200 of those took the action you define as your activation point, your Activation Rate is 80%.
You can use your Activation Rate to understand how effective your onboarding process is. If not enough customers activate their accounts, you can build systems to help them get to that moment faster.
This could include adding a product walkthrough after someone signs up, creating an email campaign designed to nurture new customers towards a repeat purchase, or improving customer support to answer customer questions as they’re learning about your product/service.
Tracking these metrics on a regular schedule will clarify whether or not you’re growing at the rate you need to — and how effectively you’re acquiring new customers.
Once you know what’s working (and what’s not), you can make updates to your marketing, sales, operations, or customer service processes and then assess how those changes influence your growth metrics.
There’s no one-size-fits-all set of metrics, but tracking these six growth metrics is a great start.
If you need help measuring your growth or implementing new marketing strategies and tactics to drive growth, Traktion can help. Tap into our network of vetted marketing experts today and get matched with marketers with the skills you need to drive sustainable growth.