How to boil down the health and growth prospects of a consumer business in few meaningful KPIs? What are these KPIs for your business? First, these are two very important questions that every operator and investor should be able to answer. Second, your data team should be able to provide a single source of truth for these KPIs across all relevant dimensions, in a metrics store for example.
#1 - Engagement of customers with your product over their lifetime
Metric: Retention Rate per Cohort
Formula: Nbr. of customers from cohort performing an actions in period p/ Total nbr. of customers in cohort
Action: Depending on your business model, an action can be a purchase or a use of your service
Cohort: Ideally the natural frequency of interaction with your product. If on average an active customer uses your service every 5 days then the period is a week
Retention Rate per Cohort. This is the most critical KPI because it answers the fundamental question: have you reached product-market fit? Engagement over the lifetime of a customer gives you a sense of how useful is a product, how big of a pain it solves. More importantly, it tells you how the relationship with your customers evolves over time and if it becomes somehow predictable. Ideally, you should see a horizontal asymptote. The product is sticky, the business has a reason for existing. If the engagement decreases over time, maybe your product is not good enough, maybe a competitor is taking some of your market share. If your engagement increases over time. You are doing great!
They were two candidates for #1 that did not make it. a) Growth. Looking solely at Growth, both amount of revenue and number of customers can be misleading. If your customers do not stick around, you have a hole in your bucket. No matter how much you are filling it up, it will end up empty. b) Churn. This is a great metric but imprecise. Overall engagement over time is better.
#2 - Cumulative profits over the customer lifetime
Metric: Average Cumulative Real Profit per Customer
Formula: Sum(profits per customer from 1st purchase to last at t) / nbr. of customers
Profits: Revenue - (Cost of goods sold (COGS) + other variable costs)
Cumulative profits. This is the second most important KPI. You have established the stickiness of the product. Now it is time to look at the unit economics and the strength of your business model. The goal is to understand if you have real margins and how does revenue flow from your customer to you over time. Revenue in that case is a vanity metric because it can hide very high costs. What matters is to understand how much it costs to deliver 1 dollar of revenue and to analyze how this stacks over time for your customers. From this curve you can decide how much to invest for acquiring a new customer (CAC) and as a consequence find how long it would take before you recover that investment (payback period).
#3 - Share of organic growth in total growth rate
Metric: Organic Growth Rate
Formula: [Total Nbr. customers at period m - Nbr. new customers coming from paid marketing - (Total Nbr. customers at period t-1 - Nbr. churned customers)] / (Total Nbr. customers at period t-1 - Nbr. churned users)
Churned users: Customers that used the service in the previous month that have not used the product this month
The 3rd most important metric is organic growth rate. You have established the stickiness of your product and the unit economics of the product. Now it is time to understand the health of the growth engine. Every business runs ads but what truly differentiates successful consumer start-ups is their ability to grow organically either through word of mouth or referral. This happens when existing customers become the best marketing channel. How to assess which customers come from an organic source or from paid marketing? In a vacuum, the organic growth rate is your growth rate when you stop running ads. This is difficult in practice to stop paid marketing efforts so the best way to go about this is to develop an attribution model to understand which parts of your new customers are not the result of paid marketing investments.
If you want to discuss what metrics make sense for your business, reach out! We are happy to chat.
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