A critical aspect for startups is trying to find the right pricing model, that takes into consideration factors such as competitive pricing, pay-back acquisition costs, and how much does it cost of a lifetime for acuqisition. This great article by Tianxiang Zhuo identifies the 5 Len Metrics Startups should track:
1. Revenue Growth.
Enterprise startups must have processes in place to monitor revenue growth. According to a Pacific Crest survey, the average year-over-year revenue for enterprise startups is 89 percent. If you’re doubling revenue every year, you’re in great shape. But keep in mind that enterprise sales cycles are typically longer and revenue growth will vary wildly.
Focus on hitting quarterly or semiannual revenue targets as opposed to daily targets, and pay attention to your concentration risk. Most enterprise startups have a smaller number of higher-paying customers, but growing revenue through a more diversified revenue base protects you in case one customer decides to jump ship.
2. Payback Period.
The payback period is the amount of time it takes to recoup your acquisition cost. A healthy payback period is less than one year for an enterprise startup, though the time frame will get shorter as you scale and refine your processes. If your payback period is any longer than this, you need to assess the ratios below to determine where to raise prices and cut costs.
Calculate your payback period alongside your cash flow analysis to help plan new opportunities to pursue in the long term. This analysis can help you determine sales projections, staffing, and marketing costs.
3. Lifetime Value/Cost of Acquisition.
The lifetime value of a customer is the current value of net future cash flow attributed to the customer. The cost of acquisition is the cost to acquire a new customer and includes marketing costs, sales salaries, and all variable expenses related to getting that customer to make a purchase.
It typically takes three to six months to close a sale, so the acquisition costs you’re spending today relate to the customers who sign up three to six months down the road. As a result, you want to make sure you compare the acquisition costs today to the lifetime value of customers you acquire in that time frame.
Your average LTV should be at least three times larger than your CAC to maintain a sustainable payback period.
4. Cost of Acquisition/Annual Contract Value.
When an enterprise startup signs on a customer, it typically has revenue locked in for a minimum of a year. This is why the CAC to ACV ratio is particularly relevant for enterprise startups to track.
Monitoring this metric allows you to refine sales commissions to ensure your sales incentives are aligned with the value of new business. Ten percent commission of the contract value is usually a fair wage for a salesperson.
The rate at which a customer cancels over a given year indicates whether your value proposition is resonating with your customers. It’s important to measure and analyze churn both by the number of accounts and the amount of revenue lost, but the best enterprise startups dig even deeper. They’ll segment their customers to analyze churn by category.
Enterprise startups should aim for an annual churn rate under 10 percent.
You should also analyze churn by cohort. There’s no need to revamp your messaging just because you lost a customer. It’s possible the customer simply had a bad salesperson or an outdated version of your product.
When you sit down and crunch the numbers, you’ll be amazed by the insights you can glean from the data. For instance, I’m a board observer of a SaaS company that sells to businesses. The company had a nine-month payback period, which is healthy, but it was losing money to customers who churned off the platform before the nine-month mark.
When the company noticed this, it decided to offer a 10 percent discount to customers who paid a year up front. Since then, it’s been able to make a profit on every single prepaid customer and recoup its acquisition costs from day one.
This is just a testament to the power of data and the importance of understanding the enterprise customer inside and out. When you’re the master of your data and use these insights to refine your business, you can position your startup for healthy long-term growth.