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.
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.
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.
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.