When starting your own business or growing your own startup KPIs tracking is one of the most important tools you can use to keep your growth on track and measure the viability of your business. We’ll walk you through the traditional and news ways of doing it.
Traditionally, the CAC:LTV Ratio is the most used KPI. This important KPI measures the sustainability of your company. This ratio can be broken down into two metrics:
CAC: Client Acquisition Cost
In a nutshell, this metric indicates how much money your company spends to acquire a new single customer (through marketing, advertising, sales, including salaries and overhead).
Essentially, the lowest the CAC, the better, so a high CAC can mean flaws in your sales process, and a growing CAC can be a sign of trouble (as your CAC is expected to reduce with time as you build your brand), but it depends on the situation: it’s not a problem if you’ve introduced a new product or service with much higher margins. Essentially, following your CAC can help you optimize your return on investment.
- LTV: Customer Lifetime Value
This metric measures how long a customer or user remains a client, on average, determining how much business value will derive from each customer.
Combining these two metrics into the CAC:LTV ratio, you get an indicator of the sustainability of a company. For a business to be successful, it must be able to drive more income from its customers, than the money it invests to bring them onboard, and to actually deliver the product/service the customer is receiving.
Although the CAC:LTV ratio has been traditionally used by investors and venture capitalists as a measure of growth and viability, there’s a new more viable KPI that was introduced by Social Capital and is used by Venture City and also by our own team in Lisbon Challenge by Beta-i – the Quick Ratio.
The Quick Ratio
The Quick Ratio is a shortcut metric to define where the product stands in terms of growth. It combines growth, retention and churn into one number that describes how efficiently your product is growing.
Essentially it’s the ratio between the new and resurrected clients over the clients lost in that month. Simply, if a Quick Ratio is >1 the number of users is growing and if it is <1 the number of users is declining.
It’s important to always see the number of lost clients in relation to the acquisition and retention of clients because it can tell you important information to base your next steps on. A company with a high retention rate doesn’t need to make a big effort in sales to keep growing steadily (as opposed to a company with a lower retention rate that would need a bigger client acquisition to keep growing at the same rate).
A lower retention rate means you need to put efforts into bettering your product, and a low acquisition rate might mean you need to rethink your marketing strategy.
The only way to have a high ratio is to keep both acquisition and retention high – that means your product has a healthy life.
The advantage of using the quick ratio is that you can apply it for your product even when you don’t have paying customers yet, or apply it to several parts of the business in order to understand its challenges.
As Eduardo Sette Camara, Lisbon Challenge by Beta-i’s Head of Acceleration put it:
In a gross simplification, sustainable revenue and growth is the end result of capturing value through a great product/service delivery. But if you want to go to the core of what drives that growth, slice up the problem and variables, and really understand what sticks, applying the quick ratio calculation to more and more granular information can deliver those insights. It’s about trying to understand cause and effect.
This is why most VCs are looking into this metric as a way of evaluating the companies they want to invest in – and so should you.