Building a sound business is about making educated guesses in your business plan about what kind of numbers you expect your business to pull and then, through operation, seeing if your numbers were accurate. Yet, so many businesses that have sales just ignore the fact that they need to confirm their business model and use its insights to help find better profitability. In this article, I’m going to discuss with you the common pitch deck metrics, what they mean, and how to determine how your business performs.
What it means: a customer churns when they pay you money and then stop paying you money. Startups use churn to talk about a lot of different metrics and it’s pretty important that you be specific in your pitch which definition of churn you’re using. When people just say “churn” they’re talking about the percentage of their membership they lose in a given period of time (usually 1 month or 1 quarter). You can also talk in terms of “churn rates.” A six-month churn rate is the percentage of people who are still paying you after 6 months.
How to calculate churn rate: (Paying Customers On 1st of Month – Number of These Customers Still Paying on 30th of Month) / Paying Customers On 1st of Month. Do not add customers that sign up within the month… this is traction, a separate metric.
Example: 1000 Customers on the 1st, 950 still paying next month. Churn rate = (1000-950)/1000 or 5%
Cost Per Acquisition
What it means: how much you spend in labor, supplies, and direct costs to acquire a customer. Your CPA must be lower than your LTV.
How to calculate CPA: Costs / Customers Acquired. Typically you would prefer splitting your CPA numbers into separate calculations by each channel of acquisition. Really smart COOs will be able to implement a multi-touch attribution model that begins to tease apart if some channels contribute to lower CPAs.
Example: If I buy a $5,000 billboard and bring in 1,000 customers, my CPA (on this billboard) is $5.
What it means: how much you expect the customer to pay you over your entire relationship
How to calculate LTV: The simplest construction is LTV = ( Total Revenue / Number of Customers ), though this is descriptive rather than prescriptive. A more complicated calculation is LTV = ( Average Purchase * Purchases Per Month ) / Monthly Churn Rate
Example: $100 Avg Purchase * .25 Purchases Per Month (Quarterly) / 5% Churn Rate = $500 LTV
Putting It All Together
Here’s a pitch that any VC in the world would love to hear: “Over the last year, we spent $10,000 in labor and costs in the sales department and we earned 500 new customers for a CPA of $20. These customers churn at 21% and average $18/month in revenue for an LTV of $85 each. Our method of customer acquisition is repeatable and scalable and we’re asking for $100k to repeat it.”
Even that’s not a lock to get funded, but it can help shore up some of the hesitations that investors will naturally have about spending money on marketing. Even with a $20 CPA and an $85 LTV, your business will be unprofitable if your cost to deliver the service exceeds $65, but at the very least, thinking in terms of customer profit metrics and locking down what the actual numbers look like early is crucial for startups looking for funding, whether it’s from a VC, bank, or startup competition.