On Tuesday, we hosted a webinar about important metrics to track when fundraising. Lighter Capital CEO BJ Lackland offered an investor’s perspective on why these are the main metrics a fundraising startup should track, and Grow CEO Rob Nelson took a deep dive into data sources and best practices around analyzing them. Check out the video here.
Below are five interesting takeaways from the webinar.
“Traction is more important than burn”
When Rob Nelson was fundraising for Grow’s Series A, investors wanted to understand the relationship between traction and marketing spend. Nelson was spending ~$15K a month on paid ads—his potential investor wanted to know what would happen if he tripled it. Nelson tripled his ad spend and his leads increased commensurately.
This was a great sign—it showed Nelson’s potential investor that Grow was spending in the right channels and targeting the right people. It also gave them confidence that Grow could put their capital to good use—there was a direct relationship between ad spend and the pipeline. “That, I think, helped close the deal with this investor,” Nelson says. “If I put money into the engine, this is the result I’m going to get out on the other end.”
Cohort analysis is everything
The deeper you can take cohort analysis, the better and more actionable your metrics will be. Nelson recommends looking at churn on a cohort analysis rather than month-over-month. The more granular you can get, the easier it will be to mine actionable insights.
For young companies the biggest obstacles to clean, useful cohort analysis are data integrity and access to tools. Marshaling the data into one place, and making sure that data is clean and reliable, can be a huge obstacle (this is one of the reasons Nelson started Grow).
Churn is relative
There is no one churn benchmark. Your churn will vary depending on whether you’re B2B or B2C, and whether you’re selling to enterprise or SMBs. There’s a whole flock of follow-on factors, too: price, cohort, product tiers, CS, etc.
In B2B, BJ Lackland says, churn tends to decrease over time. Your product gets better. Your development team gets better at identifying and building the features your users want to see. In B2C, however, it’s not uncommon for churn in later cohorts. Dollar Shave Club, for example, reported low churn in their earliest cohorts and substantially higher churn for users who joined later. Their thinking around this was that the early subscribers were the die-hards. New customers were more likely to be dabblers—they had heard of the service and wanted to give it a shot, but they were also more willing to quit if they didn’t get exactly what they wanted.
At Lighter Capital, we see huge variations in churn depending on whether a company focuses on selling to enterprises or SMBs. Enterprises take longer to onboard a product and can take a very long time (sometimes years) to decide that it’s not the right tool for them. In enterprise cohorts, a churn of more than 25% would be high. SMBs, however, have a more “turn it on, turn it off, turn it on” mentality to SaaS products. Nelson’s research indicates that SMB B2B churn often ranges from 35% to 50%.
B2C typically has much higher churn. At Lighter Capital, we see a range between 40% and 80%, typically, and anything above 50% isn’t uncommon.
CLTV is a slippery metric
Customer lifetime value can be difficult to calculate. Zappos’s analytics team spent six months trying to figure out their CLTV and eventually gave up.
Unless you have several years’ worth of data, your best analysis is going to be based on churn. And that’s fine—it’s a difficult metric for younger companies to track.
Iterate on pricing to control ARPC
Tweaking your pricing model can give you interesting fluctuations in many metrics. If you have visibility into your data, this doesn’t have to be a scary thing. In fact, it can open up a space for you to play with ARPC and sales pipeline.
Nelson was able to optimize Grow’s average revenue per customer (ARPC) by tweaking the price of the product. “We look at the conversion rate from opportunities to closed-won deals, and that determines a lot,” Nelson says. “We have the ability to control pricing—as long as that opportunities-to-closed-won rate doesn’t drop. We’re probably on our 25th pricing iteration at Grow.”
Monthly or yearly subscriptions can also have a huge impact on ARPC and conversion rates.
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