There’s a great big world out there that isn’t limited to manufactured goods and project-based services. When you’re selling ongoing services (even if they’re associated with physical goods you’ve sold), the business processes behind the scenes can look quite a bit different. You’re dealing with ongoing relationships. Order management can mean service upgrades or downgrades, rather than a new batch of widgets. It can mean keeping track of customer usage and billing in arrears for what they’ve consumed (think long-distance minutes or per-gigabyte bandwidth fees in the telecom world). It can mean incredibly detailed and voluminous invoices — for you to prepare and for your customers to review. That’s the immense challenge and great potential of recurring revenue-based business models.
Key Performance Indicators
When the health of your business requires the same customers to come back week after week, month after month, and year after year, making sure they’re continually happy is paramount. A popular measure for this is your Net Promoter Score. To find your NPS, you need to survey your customer base, asking them a simple question: how likely are you to recommend our products or services to your peers? You solicit answers on a scale of 1 – 10. Add up the total number of 9s and 10s (Promoters), subtract the number of 1s through 6s (Detractors), and your have your NPS. It’s straight-forward, pretty reliable, and is great to track trends over time.
Lifetime Customer Value
How much money can you expect to earn from an average customer over the span of their buying relationship with you? That’s LCV. This is important, since we’re focused on aggregating years of combined purchases, charges, and fees that add up over time. It requires knowing average monthly revenue and average customer lifetime (i.e. $10/mo and 13.2mo/customer).
Customer Acquisition Cost
How much does it cost you to acquire a new customer? There’s a lot that goes into this figure, but we’re really looking at advertising, marketing, business development, and sales cost divided by the number of new customers over a period of time. Hopefully your staff is devoting some time to up-sell and cross-sell opportunities, so the entire amount wouldn’t be devoted to new acquisitions.
Customer Attrition Rate
What percentage of your customer base do you lose over a fixed period of time (say, per year or per quarter)? Do not offset this with new customer acquisitions, as you want an accurate picture of losses that isn’t smoothed out by promotional activities.
Connecting the Dots…
By combing the measures above, we can assess the overall health of the business. We’ll know how many people we’re losing, how much it will cost to replace them, how much we can expect to earn from those who stick around, and by correlating satisfaction with attrition, figure out what we need to do to keep people engaged. These are all determinants of future growth and profitability, and top of mind for investors looking to assess whether a particular service-oriented business is a sound investment.