Google Analytics is an incredible tool that has democratized data. But, one of its weaknesses is that it’s a visit based analytics tool, instead of a person or customer based tool.
If you work at a subscription based ecommerce company, you may rely on four key business metrics to measure the health of your business – and none of them come from Google Analytics.
For simplicity, I’ll use the word subscriber where you might use customer or user.
Average Revenue Per User (ARPU)
ARPU measures, on average, how much each subscriber buys from you every month. Simply, it’s the total revenue divided by your active subscribers. ARPU plays a critical role in determining your ability to hit revenue targets.
Imagine you want to get $9,000 in revenue for your business. Either you have to have 100 subscribers with a $90 ARPU or 180 subscribers with a $50 ARPU:
What does it cost you to acquire a new customer? How good are you at selling incremental products to your existing customers? Putting ARPU in focus helps you understand which revenue or customer acquisition levers you need to work on.
For any business, especially subscription ecommerce companies (Barkbox, Artsicle, H.Bloom) or SaaS products (Acquisio, SalesForce, Omniture), customer retention is critical. The return on the customer acquisition and operational investments happens not immediately, but in future months of recurring revenue.
Subscriber churn is the percentage of your subscriber base you lose each month. If you have 100 subscribers at the beginning of the month and 10 percent churn, you end up with 90 subscribers unless. The higher your churn rate, the faster and cheaper you have to acquire customers to replace the ones you lose.
Imagine you stop acquiring subscribers and let your business run as is. Here is what the next 5 months would look like with 10 percent churn vs. 5 percent churn:
At 10 percent churn, you lose 34 percent of your subscribers and revenue within 5 months vs. 19 percent at 5 percent churn. Reducing churn is a bit like conversion rate optimization: it has an immediate revenue impact and it lifts the ROI of all of your marketing activities.
Lifetime Value (LTV)
Lifetime value is the average revenue a subscriber will generate over time. It’s a function of two metrics:
- Persistence – How many months, on average, a subscriber remains a paying customer. Essentially, the opposite of churn.
LTV = ARPU * Persistence
The higher the lifetime value, the more profit you pocket or the more you can pay to acquire new customers (Customer Acquisition Cost, detailed below).
If you wanted to hit $450 in LTV, you either have to increase ARPU or Persistence:
Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) is how much you pay for every subscriber. In order to make number, this number has to be lower than your LTV. The wider the gap, the more money you have to cover your expenses, make a profit or fuel additional customer acquisition.
CAC is your total costs divided by the number of subscribers. It’s directly related to all of the metrics online marketers are intimately familiar with: CPC, visits and conversion rate.
The ratio of CAC to LTV is a quick read on the efficiency of your business and market. Consider the two ways you could hit a goal of a 2.5 ratio:
Assuming a steady CPC, either you have to increase conversion rate to 2.5 percent or LTV to $1,250.
CAC, ARPU, LTV, and churn are vital metrics. You can segment them by line of business, product, cohort, marketing channel… the list goes on. As you consider what makes an effective dashboard, I recommend you look beyond just the standard online tools.