Once you go to the market, it becomes a numbers game. If I can deliver $3 of value for every $1 spent, I will be successful.
These are a few metrics to consider
- Customer Acquisition Cost – CAC – What does it cost you to acquire a customer. All the ads, marketing costs, free versions, and overhead.
- Average Spend – what is the average ticket spend.
- Lifetime Value – LTV – Over the product’s life, the margin or profitability per customer.
- Churn – For every customer that goes at the top of the funnel, how many customers leave. If every month 10% of your customers leave, you need to replace your entire customer base every ten months. So a good churn is below 5%.
- Break Even – (Sales – COGS) divided by overhead. How long until you reach profitability?
- Burn rate – How much you are losing every month (negative cash flow). You need enough working capital to reach breakeven.
- Payback period – This is a risk assessment. A product with a shorter payback period is less risky.
- Net Present Value – Taking into consideration the time value of money. For example, $1 Million is worth more today than receiving the same amount 5 years from now. We discount some Future Value by a discount rate to determine what it would be worth today. We often use NPV to decide between competing projects.
- Return on Investment – ROI – (Revenue – costs)/costs = %. For example (30,000-20,000)/20,000 = 50% ROI. The problem with ROI is it does not consider the time value of money.
- Internal Rate of return – IRR – IRR is the same calculation as NPV, where NPV is 0. The IRR indicates the annualized return rate for a given investment-no matter how far into the future and a given expected future cash flow. ROI indicates total growth, start to finish, and investment, while IRR identifies the annual growth rate.
Understanding these metrics will help you make productive decisions when growing your business.