5 Key Metrics That Define The Success of Your Business

October 19,2016
It all comes down to the bottom line at the end of the day. But if you don’t know how much money you are spending to acquire a new customer or understand why they’re canceling services, then you’re simply losing more than just revenue. If you offer professional Salesforce services or SaaS services, then it’s in your best interest to know the core metrics that compose your business.
 
We’re going to define 5 key metrics that all software businesses should know about and what to look out for if your current numbers are declining. 
 
1. Customer Acquisition Cost (CAC) - This is the most important metric of all. It can determine whether or not you are profitable and running a successful business. The formula for calculating CAC is:
 
CAC = (Cost spent on customer acquisition) / (Number of customers acquired during the duration that the money was spent)
 
The higher your CPA (cost per acquisition), the more you are shelling out to acquire new customers. In order to reduce your CPA, focus on more targeted keywords, optimize your landing pages and consistently A/B Test your Google AdWords. Make sure you review you Google Analytics at least on a weekly basis to see if you are getting a good return on your online campaigns.  
 
2Lifetime Value (LTV) - Lifetime value is the projected revenue a customer will bring in from the instant they are on board with your company. The formula for calculating the LTV of a customer is the following:
 
LTV = (Average value of sale) x (Number of repeat transactions) x (Average retention time in months or years for a typical customer) 
 
Once you’ve determined the LTV of your customers, you will then have a better understanding on much to invest in your marketing campaign to acquire them. How much is each lead worth to you in the long term? At CloudTech, we focus on premium Salesforce integration and app development services. So, our LTV per customer will be a bit higher, since the lead nurturing process is much longer. 
 
3. Churn Rate - Churn rate or attrition rate, is another critical metric to focus on. It has a direct impact on your LTV and on the overall sustainability of your business. There are two different types of churn, customer, and revenue. These are the formulas: 
 
Customer Churn Rate = (Number of customers lost in a period) / (Number of total customers at the beginning of the period)
 
Revenue Churn Rate = (Amount of recurring revenue lost in a period) / (Amount of total revenue at the beginning of the period) 
 
Churn is inevitable, however, there are steps you can take to minimize churn rate in your company. Speak to your customers directly. The only way to understand why they are losing interest in your services is simply by asking them. And the best way to do that is through customer surveys. 
 
Customer surveys will tell you more than you need to know about what’s wrong in your business and how you can fix it. Conduct short customer surveys of no more than 8-10 questions, gather up all the data and make improvements accordingly. Don’t forget to send thank you emails and follow ups to each customer, making them as personable as possible. 
 
4. Monthly Recurring Revenue (MRR)- MRR is the amount of revenue you expect to receive on a monthly basis. It is also incredibly essential to the growth of any SaaS company since it can take several months to justify the CPA of each customer. The MRR formula is listed below: 
 
MRR = (Total number of paying customers) / (Average amount all of the customers are paying you each month, more commonly referred to as the ARPU or average revenue per user)
 
The sales lifecycle for any cloud or SaaS company is a long and consuming journey. The monthly recurring revenue breaks down into three components; the New MRR, the Expansion MRR and the Churned MRR. The New MRR is revenue from new customers, while the Expansion MRR is about upselling and cross-selling to existing customers. And finally, there is the Churned MRR, which are customers that were lost due to cancellations and downgrades. Once all three are factored into the equation, you get your New MRR. 
 
5. Viral Coefficient - Think of this metric more as a referral. It can be done through social media through the sharing of content or through email invitations. The viral coefficient formula is calculated as such:
 
Viral Coefficient = (Number of current customers) x (Number of invites sent to each new customer) / (Percentage of those invites that converted)
 
The viral coefficient must be greater than 1. Anything less means that you will have to increase your cost per acquisition to bring in new customers. Let’s go into more details about how the viral coefficient works. 
 
Suppose you have 200 customers. Each customer sent out 5 invites to their friends, giving us a total of 1,000 invites. Now, let’s suppose only 8% of them subscribed or 80 new invites. You began the campaign with 200 customers and an additional 80 new customers came along. We then divide the new customers by the total customers we started out with (80/200). The viral coefficient for this particular example would be 0.4, which is quite low. 
 
That means your advertising budget will have to go up. Focus on creating social media campaigns that will go viral. You can check out some helpful tips from social media marketing guru, Gary Vaynerchuk to avoid having a low viral coefficient. 
 
Closing Thoughts 
 
There are tons of metrics and key performance indicators out there. By narrowing down the list and going with a selected few, you can better target your online and offline advertising campaigns, reduce overall churn rate and increase your bottom line. 



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