During the morning keynote at IT Nation Connect, Craig Fulton, chief product officer of ConnectWise took to the stage to drive home the importance of offering managed services. “The as-a-service model is essentially about the customer experience,” he said. “Your customers are paying you for productivity and uptime. It’s a customer’s world we’re living in.”
He continued by explaining how the first 6 to 9 months of working with a new customer are the most critical. “It’s your chance to make an impression and build loyalty,” he stated. “It’s also the time when churn happens the most.” That is, dissatisfied customers will leave and, according to some research, when they go, they take 3x to 4x their initial value with them.
As you know, getting customers is more competitive than ever. Retaining them is critical. With this in mind, Fulton shared just a few key metrics you should be tracking in your business.
Churn is typically measured by how many new customers come in versus how many leave over a period of time. However, churn can be more meaningful to an as-a-service-focused company when you look at the services you lose on a month-to-month basis. For example, you can sell 5 things to a customer and have 3 get canceled. While you didn’t lose the customer, having 3 out of 5 services canceled isn’t healthy.
Retention is similar to churn, but tracks how many of your customers and services you keep month to month. Keep an eye on this number to ensure that you can take actions that ensure a high retention rate. Getting customers is expensive so you must keep them.
Customers Acquisition Costs (CAC)
It’s important to know how much it’s costing you to bring in new sales. You can track this by combining the expense of your sales, marketing, and onboarding costs and dividing that total by the number of new customers won over a period of time.
(sales + marketing + other onboarding costs) / number of new customers
For example, if you spend $20,000 a month on sales salaries, marketing, and other onboarding costs and you bring in 4 customers, your CAC is $5,000 per customer. Interesting to know, but more valuable when combined with the next metric to track…
Lifetime Total Value (LTV)
LTV is useful in predicting revenue. You take your gross margin average. The LTV will give you a good idea of how much a customer is worth to your business over the course of their life as a customer.
(gross margin x monthly recurring revenue) / monthly churn
For example, if your gross margin is 40%, monthly recurring revenue is $5000, and average churn rate is 2%, that customer has a LTV of $100,000. This is one of the more simplified versions of this calculation. You can refine the metric by including discount rates, average lifespan of customers and more.
Metrics, Now What?
A simple, yet valuable, way to use these metrics is to evaluate your ratio of CAC to LTV. Anything lower than 1:3 isn’t good, says Fulton, while above 1:5 is amazing. By knowing your metrics and ratio, you can make informed decisions to improve your business and profitability.
If you’re looking for more information on metrics and establishing best practices necessary to collect these metrics and improve on them, you should check out ConnectWise’s Path to Success webinar series.