The top 3 metrics to look at for growth

When it comes to startups, there’s an undeniable desire for growth. Not only do more customers mean more revenue, but also more awareness and potential for a larger customer base. The question is: what are some of the top metrics that prove growth? Let’s review the top 3 metrics to look at for growth! Of course, you could simply show a growing number of installs, revenue, MAUs, or DAUs. But such plain metrics mean nothing in context. Your revenue could just be blown up by increased marketing spending. Sudden organic behavior not driven by product features but maybe press mentionings. Those are all factors that can help grow fast. But you will fail if your app or website doesn’t prove growth with these 3 most important metrics you need to watch. And improve step by step. In the following, we will dive deeper into these three metrics. Lifetime value (LTV), customer acquisition cost (CAC), and return on ad spend (ROAS). Let’s get started.

Lifetime Value (LTV)

Lifetime value estimates the revenue, or contribution when explicitly defined that way, that a user or customer generates over their relationship with the app. Acquisition cost is a separate metric to compare with value, not a factor to multiply into LTV.

For an observed app cohort, begin with a defined acquisition period and measurement horizon:

1. Group users acquired in the same period. Keep market, OS and acquisition definitions comparable.
2. Add the revenue those users generated through the chosen horizon, such as day 30 or day 90.
3. Divide that revenue by the original number of users in the cohort. Include users who generated no revenue.

This gives observed revenue per acquired user through that horizon. It is not automatically full lifetime value. A lifetime forecast needs assumptions about future retention and monetization, and should be checked against mature cohorts. State whether you use gross revenue, revenue after refunds and store fees, or contribution, so the comparison with CAC is meaningful.

For budgeting, compare cohorts at the same age and keep observed results separate from forecasts. A short payback period and a profitable lifetime are related questions, but they are not the same measure.

Cost Per Acquired Paying Customer (CAC)

CAC is a metric that determines the cost of acquiring a paying customer. You can calculate it by dividing the total cost of marketing/advertising by the number of paying customers acquired. It’s important to be aware of your company’s CAC, as it can tell you a lot about what strategies are working for your business or how much money you may win or lose by comparing CAC to LTV. Imagine your calculation shows a CAC of 10, but your LTV is only 8. You quickly know this won’t last long and you should do something. Most importantly, CAC helps marketers to understand how efficient their activities are and gives them signals to tweak their plans to minimize CAC.  In an ideal scenario, a low CAC will help you safely increase your advertising budget to bring more users while maintaining this CAC to achieve exceptional growth rates.

Here are 3 ways to reduce your CAC

1. Increase your rations: assuming that you’re promoting a subscription in your app, you can increase your install to signup rate, signup to subscription rate, or just install to the subscription rate. For example, you spent $10 and got 10 installs that generated 2 subscriptions which make your CAC = $5. If you optimize your funnel to increase your install to subscription rate to generate 3 subscriptions from the same 10 installs that you acquired at $10, then your CAC will drop to $3.33
2. Retarget dropouts: continuing with the above example, you have 7 users who didn’t convert into subscriptions, assuming you spent $10 more to retarget them and generated 5 subscriptions at a CAC of $2. Then your overall CAC after the retargeting will become $2.5
3. Spend efficiently: looking at your CAC broken down by ad channel, campaign, adgroup, and/or ad will help you understand where you acquire expensive paying customers vs ideal cost to maintain profitability or even increase it. Here you just need to decrease spending on expensive channels or campaigns to spend more where you get the most value.

Lowering your CAC is one way to be successful obviously, but there is so much more you could do looking at the other metrics, eg. RR or LTV which can be dramatically improved by a few simple product changes maybe.

Return on Ad Spend (ROAS)

It is a metric that shows how well an advertising campaign is doing with regard to the amount of money spent. In other words, ROAS measures how much value or return you are getting from every advertising dollar.

Calculating ROAS

It is very simple and straightforward. Just divide the total revenue from an ad campaign by the total spent on that ad campaign. The ROAS formula takes into account the revenue derived from advertising over a certain period of time. It does not take into account any marketing costs such as design, production, or personnel because these are included in your return on investment “ROI” formula  Your goal here is a high ROAS because it indicates a higher spending efficiency and thus indicates that your agency partner or your marketing team is making better decisions and following a good strategy to obtain business goals. Again – here comes a tricky thing that many people don’t know or simply ignore. If you don’t know when your customer clicked an ad (costs incurred) you won’t be able to truly understand your ROAS. The above-mentioned cohorts play a huge role here. You need to check your total revenue against your Day0 revenue, the revenue that happens just the same day you acquire a new user.  You will quickly understand that Day0 revenues are (in most businesses) much lower than total revenues. Now imagine you simply pause all marketing but still you may receive revenues … you need to understand how many days this chunk of longtail users comes back to you and keeps purchasing / making revenue.

Bonus

There are a number of different growth metrics you may wanna look at but each metric will give you a piece of the final picture and there is no single measurement that can dictate if your product will grow profitably or not. Here are a couple of extra metrics that will help you get an additional piece of information about your mobile app marketing and website growth:

1. Click to Sign up rate: This metric simply gives you an understanding of how many users really sign up from the number of users who click on your ad. It’s important to understand if you’re really targeting your buyer persona or just doing it and hoping for luck. Also, Sign up here could be a different event such as trial started or app install…etc
2. Sign up to purchase rate: This metric will give you information on your purchase ratios or simply how many users purchased after signing up. You can use such information to enhance your purchase flow or your conversion funnel and gain more customers. Also, Sign up or purchase here could be a different event such as trial started or subscribe…etc
3. Average order value: is the average money spent when a user makes an order. This information will help you adjust your marketing and pricing strategies and your goal here will be to increase this average order value.
4. Cohort Cancelation rate: Here you learn the percentage of users who cancel their subscription within a certain time frame. Usually, businesses look into the Day0 cancelation rate to evaluate the success of a certain market, offer, or campaign. You should use such information to adjust your strategies and your goal is to decrease such cancelation rate which means more revenue to your business.

Conclusion

All you need to do is to look at multiple growth metrics to get as close as possible to the full picture. And create your own north star metric that meets your needs because managing growth is simply more difficult than just one specific metric. your growth lead should be doing it like this already. That’s it for this one, like and share. Ciao!