Running a technology start-up is fun
but eventually you have to build a business which generates profit and self sustains.
It’s not about the money, money, money
We don’t need your money, money, money
We just wanna make the world dance,
Forget about the price tag
Price Tag, Jessie Jay
Two metrics make all the difference
Running a technology start-up is lots of fun, (and I know for me part of the reason that I have chosen this as my career path is because I really enjoy the act of creating something new), eventually you have to build a business which generates profit and sustains itself. There are several different stages on the Start-up Curve between these two utopia.
This article focuses on the right-hand side of the curve. The metrics which you need to master before your start-up is ready to move into the Growth and Scale phase. For a Business to Business company there are really only two metrics which matter:
- Cost of customer acquisition (CoA)
- Customer lifetime value (CLV)
Knowing these two metrics (and assuming that CLV > CoA) means that your business can profitably scale. Then it’s just a matter of executing till you reach “the promised land”
Calculating the metrics
Cost of Customer Acquisition (CoA)
Cost of Customer Acquisition basically tells you “how much it costs to get a new paying customer”. Note the word paying ;-)
Fortunately CoA is fairly simple to calculate. Within CANDDi we calculate our monthly CoA as the amount we’ve spent on marketing / advertising plus the salaries paid to our sales staff divided by the number of new customers generated this month. This number can be a little volatile (especially in the first few months), for example a trade-show or a new staff member can bump up the number whilst results come a month or two later. We then calculate our over-all CoA as the average of the last 4 months.
Customer Lifetime Value (CLV)
Customer Lifetime Value tells you how much revenue you expect each customer to pay you. This is a much harder metric to calculate (because this is making future predictions rather than using historic analysis). (And despite my co-founder and I both being MBA’s this was never something we were taught to calculate at business school - lol)
Fortunately there is a formula which can estimate this using some “hard data”. In order to calculate CLV you need to know your
- Average Revenue per Customer (we use Average Monthly Revenue)
- Churn rate (how many of your customers stop paying per month)
Rather than describe the formula in this sheet - we’ve released our spreadsheet
Cost of Customer Acquisition and Customer Lifetime Value, we think these are the two most important B2B metrics - what’s your opinion?