My friend, David Vandegrift (Associate at Pritzker Group Venture Capital), just co-wrote a couple articles on SaaS metrics that he and his VC colleagues pay close attention to – Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV).
They highlight the importance of CAC and LTV, specifically, as VCs are looking for sustainable businesses that have shown good handles on burn rate and revenue economics. Gone are the days of “easy millions” for startups with just traction. VCs are wary of bubbles and downturns, and thus, are watching for investments that can weather storms.
CAC and LTV are great metrics to have good handles on, but can be difficult for early stage companies, as noted by the authors. Specifically, lifetimes of customers can be quite short while CAC can be hard to measure as companies iterate their acquisition strategies.
One metric I assess that is less focused on economics is engagement/ retention (i.e. D1, D7, D30). Engagement is a hugely telling figure, especially for early-stage companies. Engagement helps identify the stickiness and value of a product while also providing great insight into features and usage which can help determine direction.
Following engagement, I evaluate churn. Churn is inherently included in LTV, but can be more operational and easier to gauge for customers. I like to review churn, especially, because it measures the value of a product/ service with existing users. It can also underline a “hole in the bucket” issue where strategies to drive new customers can be for naught if existing customers continually exit.
Check out David and Sonia’s post to learn more about CAC and LTV. Then, check out four other metrics (in addition to the two I listed) that are key to success – “8 Metrics from Proper Instrumentation of a Business and Its Product”.