There are several key performance indicators that help new generation company management see more clearly their progress and corporate health. The old measures, including return on investment, percentage of profit against revenue or employee count, and more, obviously are still relevant. But businesses that expose their story to tens of millions of potential customers through the Internet need additional tools. Some of these are also applicable to non-Internet businesses.
Some of these measures, and how to calculate them.
You will recognize the value of these for any business, even if they have not been in common use in the past.
- CHURN (% customer cancelling each month)
- This is calculated by dividing the number of cancellations by the total number of customers before cancellations and multiplying by 100.
- CMRR (Contracted Monthly recurring Revenue)
- A simple statistic which can be derived from a good general ledger using GAAP accounting procedures. Revenues are recorded as earned, not paid, especially when paid in advance. This number is increasingly used by appraisers and buyers in valuing a business, with some multiple of this number being one measure of the value of the enterprise.
- [Email readers, continue here… ] LPC (Lifetime Profit per Customer)
- This is the total expected revenue for a customer (usually calculated with a five year life no matter what the type of business) less the cost of acquisition (see below) less the recurring direct costs of serving the customer or of product estimated to be sent to the customer over the lifetime relationship.
- CACR (Customer Acquisition Cost Ratio)
- This is a measure of capital efficiency, focusing upon the cost of acquisition of the customer (including direct sales, commission payable, direct marketing and other direct costs) divided by the expected gross revenues over the customer’s estimated lifetime of purchases. The lower the ratio, the more successful the customer acquisition campaign.
- CPA (Cost per Acquisition)
- This is simply the sum of the month’s direct costs for sales and marketing divided by the number of new customers acquired, yielding a dollar cost per average new customer. The lower, the better.
- MBE (Months to breakeven)
- A better measure of capital efficiency. Total new customers this month times the average expected revenue – divided by total direct sales and marketing cost together with the cost of product or service for those customers for the month. The result will yield the number of months the average account takes to be profitable for the company. The lower the number, the more efficient the marketing and sales campaign, and the more efficient the use of financial capital in customer acquisition.
Shedding light on your efficiencies
Surely some of these measures would, if used by your organization, shed additional light on the efficiency of the operation and over time the trends related to efficiency.