The number one reason brilliant companies with stellar products and services fail is that they run out of money. They have rousing press. They have fervent customer acceptance. They revel in month-over-month increases in traffic and revenue. And they have no idea what is influencing their bottom line.
The greatest challenge in building a company is determining where to focus our valuable resources – time, energy, and capital.
Let’s look at four basic metrics that will help us gain control of our bottom line and in turn help us make money: customer acquisition costs, value of customers, viral coefficient, and DAU.
Customer Acquisition Costs and Value of Customers
Macrohard Software just completed a new campaign, which set them back $30,000. But they are not worried because the campaign yielded 100 new customers, who have each signed up to pay $10 per month to use their software.
Was this the most effective use of their capital? The customer acquisition cost was $300 per user. The value of the customer is $120 per year. This means it will take over 2 years to recoup the $300 they spent.
Clearly, this campaign was not as effective as it could have been. When we understand the true cost of each customer and the real value they will yield, we will have greater visibility into our bottom line.
OliOrange designs yoga wear for the most discerning yoginis. They’ve enjoyed robust sales online and are ready to take their experience into the physical world. Knowing that a retail build out is expensive, they set out to gather data to ascertain the most lucrative location. They emailed 100 promotional “refer a friend” codes to each of their two largest markets – Brooklyn, NY and Corte Madera, CA – and analyzed the results:
The 100 emails sent to Brooklyn, NY customers were zealously distributed, yielding 100 new customer purchases online (a viral coefficient of 1). The 100 codes sent to Corte Madera, CA barely saw the light of day, yielding 50 new customer purchases online (a viral coefficient of .5).
OliOrange set up shop in Brooklyn, NY knowing that their Brooklyn, NY customers were more passionate about their brand.
Spending money on less than enthusiastic customer segments deteriorates our bottom line. When we understand where our loyal customers are, we can invest our resources appropriately, enhancing our bottom line.
Live Forever is a popular site providing daily tips to help users live longer, happier lives. Unfortunately, as they move into their third year of operations, they are still not able to breakeven, as revenue fails to cover the expenses of running their site.
They monitor their traffic and are pleased with the general increase in the number of people who come to their site. However, despite their strong traffic they have never been able to build a cohesive community, which negatively affects their ad revenue. They investigated their daily active users (DAU) and monthly active users (MAU) and found the following:
Their daily active users were 1 million, yet their monthly active users were a staggering 10 million. Only 10% of their users visit the site on a daily basis, which is paltry considering Live Forever is a site that provides daily tips.
They studied sites that enjoyed 50% DAU/MAU rates, such as Twitter and Facebook, and revamped their structure and content to provoke daily viewership. Since their revamp, they’ve been able to increase their monthly ad revenue by 40%, as their viewership has galvanized into a cohesive, active community. This increase in revenue has helped them to achieve profitability.
If we don’t know what is wrong, we can’t fix it. When we monitor our performance based on relevant metrics and compare our findings against our peers, we can enhance the user’s experience and in turn enhance profitability.
In summary, reviewing a few basic metrics can help us gain control of our bottom line and make money. When we understand the true value of our customers, we don’t overspend on acquiring low value customers. The ability to hone in on our most enthusiastic customers allows us to funnel our resources into the most lucrative customer segments. When we measure and benchmark our retention to industry leaders we learn from their success and reap the rewards.
This post originally appeared on Atelier Advisors. Lili Balfour is the founder and CEO of the SoMa-based financial advisory firm, Atelier Advisors, creator of Lean Finance for Startups and Finance Boot Camp for Entrepreneurs. All AlleyWatch readers are automatically eligible for a 50% discount on either of the courses using the preceding links.
Image credit: CC by David Ohmer