3.1 Acquisition Metrics for Growth

As mentioned previously, the best metrics are ones that fit your business model, objectives, and success criteria. Nonetheless, below are a few acquisition metrics that are commonly used by businesses and can serve as a solid starting point for your own growth efforts. Each of the following metrics can provide a unique perspective on the levers that you can pull to stoke user growth, and it is worthwhile to try incorporating each of them in your process to see which strategic angle might yield the greatest gains. It is also important to note that your growth team can customize and build upon these standard metrics to really capture your unique business and growth models.

3.1.1 Conversion Rate

Probably the most common metric that growth leaders track for online products and apps is conversion rate. In a generalized form, a conversion rate measures the proportion of people that completed a process after starting it. It is important to really pay attention to what events are considered as the “start” and “end” of a process. For example, if you were measuring the conversion rate for registrations, what two events are you actually comparing? Are you comparing the number of people that successfully submitted a registration form to those all those that came to your website or just to those that came to the registration form? Or maybe then successful action is not just submitting the registration form but rather also being approved. Some common conversion rates are the proportion of people that:

  • Saw an online advertisement and navigated to a website,
  • Saw a call to action and navigated to a high-value page or screen,
  • Started the registration process and successfully finished it, and
  • Added an item to their cart and successfully purchased that item.

Some conversion rates can measure the effectiveness of your acquisition efforts as well as engagement, so it is important to consider what actions you are tracking and how they relate to business functions such as marketing, product development, and operations. For example, the conversion rate of people that started a registration process and successfully finished it might depend mostly on how the registration process is implemented rather than on the marketing that drove people to the registration page.

Conversion Rate Formula

At the same time, it’s very likely that the conversion rate for the registration process is also a function of the effectiveness of the marketing efforts. Let’s imagine two scenarios for an online project management software. In one scenario, marketing does a great job communicating the benefits of the tool to prospective customers. In another scenario, marketing does not communicate the value proposition very well. It’s reasonable to assume that those individuals that were exposed to the more effective marketing campaign would be more likely to complete the registration process because they have a greater conviction that the project management tool will be valuable in their work.

Clearly, the conversion rate for the registration process is probably a function of both product implementation (how easy it is to register) and marketing effectiveness (how convincing is the marketing messaging). Other conversion rates such as the proportion of people that see and click on online advertisement can capture the effectiveness of your marketing message and channel alone. The important point to remember is that if the conversion rate you pick could be affected by more than one function (marketing, product implementation, operations), your team should carry out your experiments on one area at a time to isolate and optimize their effects. For example, if you believe that the registration rate is affected by both how convincing the marketing message is as well as how easy it is to actually register, you would likely want to try optimizing marketing and product implementation separately rather than at once.

One question that business leaders typically have is what is a “good” conversion rate? It’s impossible to provide a general benchmark because conversion rates vary not only by product type but also by what you are trying to measure. For example, the conversion rates for seeing and clicking on online advertisements tend to be in the single digits while conversion rates for registration are likely much higher. In fact, it is really not useful to compare your conversion rates to benchmarks. Rather, realize that they can always be improved, and aim to constantly be ratcheting them up.

Another important point to understand is that conversion rates in themselves do not paint a holistic picture of growth performance nor do they provide insight to all the opportunities that exist. It is important to look at other metrics such as the customer acquisition cost and the rate of visits to key pages to gain a broader perspective on optimization possibilities.

3.1.2 Customer Acquisition Cost (CAC)

Another common metric used to gauge the effectiveness of a company’s acquisition efforts is customer acquisition cost (CAC), which is primarily an indicator of the efficacy of the company’s marketing efforts. As an example, imagine that you are using two channels to advertise your product, pay-per-click as well as online video advertisements. You do the numbers and find that the video advertisements have a conversion rate of five percent while the pay-per-click advertisements have a conversion rate of only two percent. If we based our growth engineering solely on conversion rate, this would be an open-and-closed case. Clearly, video wins, right?

It’s not necessarily true that video is the better marketing channel. Simply put, it could be that video costs way too much even though the conversion rate is much better. The video production costs and the ad placement costs can add up to the point that what you are paying for an actual sale is inferior to what you would have paid had you advertised with a pay-per-click ad. Even worse, it could be that you are losing money on every new customer because your cost per customer acquisition is less than the average revenue for that customer.

Customer Acquisition Costs Scenarios

Let’s consider an example, since it may not be intuitive how marketing with a higher conversion rate can be less worthwhile than ones with a lover conversion rate. Imagine that you are marketing a project management software over two channels: online video and pay-per-click (see table above). Which one is more effective?

For your video campaign, you had to hire an advertising agency to make the video, which cost you a total $50,000. Over the course of your the campaign, the video advertisement was displayed 100,000 times, and it cost you one cent every time it was displayed (cost per impression) for a total of $1,000. Of the 100,000 times that your video was displayed, people clicked on the link in the advertisement 5,000 times, which gives you a click conversion rate of 5%. Taking into account the production costs ($50,000) and the placement costs ($1,000), you have spent $51,000 to get 5,000 people to click on the advertisement and navigate to your site. Your cost per conversion is $5.10 assuming that we measure conversions as the proportion of people that click the link in the video and navigate to your site.

Let’s now consider your pay-per-click campaign. You have experience running pay-per-click advertisements, so you create the campaign on your own without having to hire expensive outside help, which makes your production costs zero. Just like the video campaign, your advertisement appears 100,000 times and gets 2,000 clicks for a 2% click conversion rate. In addition, it costs you $1.00 every time someone clicks the link in your advertisement and navigates to your site, which adds up to $2,000. Your net cost per conversion is simply the cost per click or $1.00. That means that even though the conversion rate on the video ads was twice as high as that for the cost-per-click campaign (5% vs 2%), the cost per conversion on the cost-per-click is less than one-fourth of video ($1.00 vs $5.10).

Should you invest your money in the pay-per-click campaign? Remember that customer acquisition cost is measure how much marketing spend it takes to get a converted customer. Clicking on an advertisement does not mean that individual will become a registered or paying customer. Let’s factor this into our fictitious example.

Let’s say that you are tracking customers that come from your video vs. pay-per-click campaigns. You find that for every two people that came from the video advertisement, one actually buys a subscription to your software whereas only one in four converts to an actual sale if they come via the pay-per-click advertising. Taking into account the conversion rate between a click and a purchase, you get a customer acquisition cost from video to be $10.20 versus $4.00 for the pay-per-click campaign. The campaign with the lower click conversion rate is actually more efficient! In fact, if the net revenue per customer is $10.00, you would be losing money on the video campaign. That is why conversion rate is extremely useful, but cost per acquisition is also critical in deciding which messaging and channel are optimal. Having established the conversion rates and customer acquisition costs for your marketing campaigns, you might want to set growth goals for your customer base. A great metric to track that goal is the rate of new customer acquisition, which is covered next.

3.1.3 Rate of New Customer Acquisition

You have two thousand paying customers. Is your company doing well in acquiring new customers? It’s difficult to tell. Perhaps your business had 1,900 customers a year ago and the customer base has barely grown. The raw number of customers does not necessarily provide a ton of insights. A much more useful measure is the rate of new customer acquisition, which tells you how well your acquisition efforts are performing in a given time period.

Customer Acquisition Rate Formula

By comparing customer acquisition rates you can tell if your business is acquiring more users now versus another historical time period. Everyone wants “hockey stick growth.” That is simply an accelerating growth rate, which means that you want your customer acquisition rate to be increasing with time. What is even more brilliant is that the customer acquisition rate can be combined with the churn rate, which is a measure of how many customers are leaving in a given time period, to provide a net customer growth rate. In other words, you want your customer acquisition rate to be higher than your churn rate, which is a measure of the effectiveness of your engagement and retention efforts.

The customer acquisition rate is a powerful top-line metric, since it measures what you ultimately want to increase: customer growth. While it is important to also track metrics that give you deeper or more specific insights into parts of your growth efforts, your team should always be tracking customer acquisition rate since not matter what the other numbers say, they better be collectively pushing the customer acquisition rate up.

3.1.4 Rate of Visits to Key Pages or Screens

Another common metric to track for online products and mobile apps is the rate of visits to key pages or screens as compared to overall visits to the site or user sessions on an app. Some businesses make the mistake of tracking just top-line metrics such as the customer acquisition rate explained above. This is a problem because actual purchases are preceded by many interactions and steps that contribute in aggregate to the overall acquisition or purchase rate. Understanding how customers progress through each step in the overall process allows your team to optimize the constituent parts of the full flow. For example, your team might be interested in the rate of visits to the pricing page to see if improvements in the navigation has resulted in more potential customers getting to the point where they evaluate the cost of the product or service.

By combining broad metrics such as customer acquisition costs and customer acquisition rate with specific and targeted metrics such as various conversion rates and visit rates to key pages and screens, your team will be equipped with data that can inform small changes that drive your progress toward your overall charted course.

This post is part of the Growthzilla Book series, which is an online draft of the print edition that will be available in 2018. Be sure to check back next Tuesday to learn about common engagement metrics. New sections of Growthzilla are published every week.

Chapter 3: Tracking the Right Growth Metrics

3.0 Good Growth Metrics

Without good data, you won’t be able to reliably analyze the results of your growth experiments, and you’ll be back to a guessing game. Assuming that your data collection methods are sound, you still have to ensure that you are capturing the right metrics — ones that can help you understand whether an experiment has met its objective as well as your success criteria. In this chapter, we will review the characteristics of good growth metrics, and some standard metrics that can get your team started.

There are many qualities that make metrics “good,” but key characteristics to look for are the following:

  • Captures your objective
  • Easy to measure
  • Accurate
  • Actionable
  • Predictive
  • Based on your growth model

Captures Your Objective

Some might claim that it’s intuitive which metrics are appropriate for certain experiments, but this is not true. Experiments are meant to meet certain objectives and satisfy success criteria that you set. For example, there is often a tension in trying to optimize customer acquisition. Should you focus on quantity or quality? You can cast a bigger net to get more customers, but those customer probably won’t be as engaged as customers that you could get through more targeted acquisition efforts.

If your objective is just to grow the raw number of customers, you might track metrics such as the rate of new registrations or the conversion rate, which captures the proportion of people that finish the registration process to the number of people that start it. However, if your objective is to build a customer base of very engaged customers, you might prefer to measure things such as your daily active users, which captures how many of your users spend time with your product each day. Another metric that might be appropriate for capturing your objective to build an engaged customer base might be the average time that a customer is using your product in a given week. As you can see, the metrics that are appropriate for each objective are as disparate as the objectives themselves, so it’s important to take the objective into account when picking a metric to capture.

Easy to Measure

With the digital age and the proliferation of tools, many metrics have become easy to capture. However, some metrics remain difficult to capture. Those data points tend to relate to the non-digital realm such as measuring the acquisition rate of customers that saw a billboard advertisement or the retention rate of people that saw a television advertisement. Often times, it’s possible to measure the effects of a given experiment using a number of different metrics, and it’s worthwhile to focus on those metrics that are easier to measure to ensure that you do not waste effort by running experiments without good data outcomes. However, it’s important to understand that there is a danger of defaulting to those metrics that are easiest to garner and not those that provide the best basis for analysis. You will need to determine the right balance for your goals. Sometimes it is preferable to opt for difficult to measure data if it will give you a clearer picture of whether or not an experiment successfully met your objective.

Accurate

Good metrics should also be strongly tied to outcomes rather than loosely represent them. For example, let’s say that you wish to impact how many purchases customers make. You could choose to measure either the customer’s intent-to-purchase or actual purchases. It is well known that intent to purchase is not always an accurate indicator of actual purchases. Therefore, you would likely be better off measuring the actual volume of purchases rather than a virtual metric such as intent.

Actionable

All metrics should be actionable in theory, but some are definitely easier to act upon than others. How actionable metrics are greatly depends on how specific they are. Let’s say that your product is an online, subscription-based task management tool. If I told you that the average customer satisfaction score for your product is 6.9 out of 10, would you know immediately what to do next? What if I told you that 4 out of five 5 customers that register for your product start but never finish creating their first task entry? Would you have a better idea of where to focus and what to try next? I hope that the second metric would arm you with much more actionable data. It takes a lot of time and resources to conceive and implement an experiment, so it’s well worth it to give some thought to how actionable the data that you intend to measure will be.

Predictive

It is always a good idea to track data that gives you insight into your business and are outside the context of a particular experiment. These metrics are different in nature than those that you should be tracking to identify if a particular growth experiment has met your objective or success criteria. Instead, the data should help to shape your growth strategy by helping you anticipate problems before they become hugely disruptive to your business. A classic example of this is the distinction between the rate of customer service emails and customer churn rate, which indicates how quickly existing customers are abandoning your product.

Let’s go back to the example of an online task management software. Imagine that your team changes a big piece of your product, such as, how tasks are created by users. Should you be tracking the customer churn rate or the rate at which your customers are contacting customer support. The former is usually calculated after the fact, whereas you can see a spike in customer support inquiries immediately. Therefore, the rate at which your customers are contacting customer support will let you react much more quickly than the churn rate, so you should be keeping your eyes on customer support emails or calls. As you think about what metrics you should track to give you general insight into the health of your business try to think about what data can tip you off about problems earliest.

Based on Your Growth Model

Although metrics such as daily active users or conversion rates are fine, nothing beats creating a data capture strategy based on your own growth model. Doing so ensures that you have precisely those metrics that are tied to variables that most directly affect the growth rate of your business. Your revenue and customer growth models should tell you precisely what metrics your team should be tracking.

Marketplace Revenue Growth Model

Let’s consider an online marketplace with the above model as an example. At first glance, you can see that you should be capturing the following metrics:

  • The number of sellers
  • The average number of posts per seller per time period
  • The number of views of items for sale
  • The number of buyers
  • The number of times an average buyer visits the marketplace in a given time period
  • The ratio of the number of times that buyers visit an item page to the number of completed sales
  • The average fee that your company charges per transaction
  • The average sale price of items in the marketplace

Not only did the revenue model help us identify novel metrics that are perfectly suited for an online marketplace, such as the number of views of items for sale, but it also helped us make standard metrics, such as conversion rate, specific and contextual to the business.

As mentioned above, making changes to marketing, product implementation, and operations is resource intensive, so it’s well worth spending some time to identify metrics that will help your team clearly determine whether your growth experiments meet their objective and satisfy success criteria to ensure that you are not wasting time and resources. Of course, it would be ideal if all of your metrics satisfied all of the criteria above, but the reality is that many will not. In that case, it’s best to focus on ensuring that the metrics that your team chooses to capture align with your model and are accurate. Beyond your tailored metrics, there are others that have become standard practice to track. We will explore these in greater details in the following sections.

This post is part of the Growthzilla Book series, which is an online draft of the print edition that will be available in 2018. Be sure to check back on tomorrow to learn about common acquisition metrics. New sections of Growthzilla are published every weekday.