Meaningful Metrics When Industry Metrics Don’t Make Sense

Recently an entrepreneur was lamenting that his cost of customer acquisition (CAC) was significantly higher than the first year’s revenue for a customer (and even higher than the lifetime value for a customer). Naturally, I started asking more questions and digging into the situation. Turns out, it was a classic case of applying industry metrics to a business that was still in its infancy. Metrics like the cost of customer acquisition being less than the first year’s revenue is a great standard, but isn’t relevant when signing up the first 10-100 customers (unless the customers pay an unusually large sum).

Imagine having two sales reps ($4,000/month each), a marketing manager ($4,000/month), modest pay-per-click spend ($1,000/month), and a tradeshow ($5,000 one-time) one quarter. Over the course of three months, that’s a sales spend of $24,000 (no commissions) and a marketing spend of $20,000. Now, say it was a good quarter and 20 new customers were signed paying an average of $1,000/year. $20,000 is new annual recurring revenue was added (no churn), yet $44,000 was spent on customer acquisition, resulting in a business with a poor magic number. Only, assuming this was early in the life of the product, say within the first 12 months, it’s too soon to definitively say that the customer acquisition model isn’t going to work.

When industry metrics don’t make sense yet, the focus should be on growing 10% every week. Weekly metrics, especially as a percentage, work well because the absolute numbers are so small. Eventually, after things go well, the absolute numbers get bigger and industry metrics become applicable. Apply the right standard to the right situation.

What else? What are some other examples when industry metrics don’t make sense?

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