Product-Market-Fit, Churn rate, CAC and CLTV: 4 key metrics for startup growth

What is Product-Market-Fit (PMF)?

Product-Market-Fit (PMF) is one of the most important metrics for any startup. It refers to the situation in which a product meets the needs of a target market. When a startup achieves PMF, customers are more likely to keep the product, recommend it to others and generate revenue.

How is Product-Market-Fit (PMF) measured?

Measuring Product-Market Fit (PMF) is an ongoing process that involves collecting data, analysing the results and taking action to improve the product. There is no single formula for measuring PMF, but there are some key metrics that startups can use.

PMF qualitative metrics:

• Customer feedback: Customer feedback can provide valuable information about customer satisfaction and market need. It is important to talk to customers on a regular basis to understand their problems, bad experiences and expectations.
• Online reviews: Online reviews can be an indicator of PMF. Positive reviews indicate that customers are satisfied with the product, while negative reviews may indicate that the product is not meeting customers’ needs.
• Recommendations: Word-of-mouth recommendations are a sign that customers are satisfied with the product and consider it valuable. If customers are talking about your product to their friends and colleagues, you have probably achieved PMF.

Quantitative metrics of the PMF:

• Number of active users: The number of active users is an important metric that indicates market interest in the product. If the number of active users is growing steadily, it is likely that the product is meeting the needs of customers.
• Customer retention rate: The customer retention rate indicates the percentage of customers who continue to use the product after a given period of time. A high retention rate is a good indicator of PMF.
• Net Promoter Score (NPS): NPS is a metric that measures customer loyalty. Customers are classified into three categories: promoters, passives and detractors. Promoters are customers who are most satisfied with the product and would recommend it to others. Passives are customers who are satisfied with the product, but would not necessarily recommend it to others. Detractors are customers who are not satisfied with the product and would not recommend it to others. A high NPS is an indicator of PMF.

Other very relevant metrics around the Product-Market-Fit

• Customer Lifetime Value (CLTV): CLTV is the total lifetime value of a customer. It is the amount a customer spends on the product during their relationship with the company. A high CLTV is an indicator of PMF.
• Customer Acquisition Cost (CAC): CAC is the amount a company spends to acquire a new customer. A low CAC is an indicator of PMF.

It is important to use a combination of qualitative and quantitative metrics to measure PMF. There is no single metric that is perfect, and the most important metrics will vary by sector and product.

Si te ha interesado este artículo no dudes en leer:

The 10 Key Steps of Mergers and Acquisitions in How to Sell a Company

The process of selling a company or an acquisition involves much more than agreeing on a price. There are several hundred aspects to negotiate. And if one refuses to agree on a price or sell their company, they won’t be able to buy someone else’s company. It is not about charging fees. This is simply business. Even if one certain company does not buy the selling company, it will be bought one way or another.

What is CCS and how is it measured?

CAC is the average cost a company spends to acquire a new customer. CAC is usually calculated by dividing the total marketing and sales expenditure by the number of customers acquired.

In general, a healthy CAC is considered to be less than EUR 100. However, in some sectors, such as enterprise software, the CAC can be much higher.

Churn rate

The churn rate is the percentage of customers who stop using a product or service during a given period of time. The churn rate is usually calculated by dividing the number of lost customers by the number of active customers.

In general, a healthy churn rate is considered to be less than 10%. However, in some sectors, such as subscription software, the churn rate can be much higher.

What is CLTV and how is it measured?

Customer lifetime value is the value associated with a customer from the time he or she becomes a customer until the time he or she ceases to be a customer. This measure does not analyse profitability so much as the length of the customer relationship.

CLTV is the total amount a customer spends or consumes at a company during its relationship with the company. CLTV is usually calculated by dividing the total customer turnover by the number of customers.

In general, a healthy CLTV is considered to be above EUR 300. However, in some sectors, such as e-commerce, the CLTV can be much higher.

What is Churn Rate and how is it measured?

Churn rate is another important metric for startups. It refers to the rate of customer churn. A high churn rate can be a sign that the product is not meeting the needs of the customers.

In general, a healthy churn rate is considered to be less than 10%. However, in some sectors, such as subscription software (SaaS), the churn rate may be higher.

Four interrelated metrics

These four metrics are interrelated. PMF is a prerequisite for a low CAC and a low Churn rate. When a startup achieves PMF, customers are more likely to be satisfied with the product and willing to pay for it. This can lead to a lower CAC and a lower Churn rate.

In our experience, here are some tips on how to improve these three metrics:

• Focus on the customer. The best way to improve PMF, Churn rate and CAC is to focus on customer needs. Talk to your customers to understand their problems and how your product can help them.
• Innovate constantly. The market is constantly changing, so it is important that your product does too. Keep innovating to ensure that your product continues to meet customer needs.
• Measure and analyse your data. It is important to collect and analyse data on the performance of your product. This will help you identify areas where you can improve PMF, Churn rate and CAC.

One last piece of advice

The search for investors and the entry of investors in a business project, in a startup (M&A) are complex transactions that can have a significant impact on the future of a company. It is important for companies considering an M&A transaction to seek advice from financial, market and legal experts to ensure they are making the best decision for their business.

Financial advisors can help companies assess the target company’s financial status, determine the price of the transaction and structure the financing deal. Market advisors can help companies understand the target company’s target market and assess the potential impact of the transaction on the company’s market share. Corporate lawyers, who specialise in M&A, can help companies draft and negotiate the terms of the deal, as well as comply with applicable laws and regulations. All of them should be experienced in this type of transaction.

By working with expert M&A advisors, companies can reduce the risk of entering into a transaction that is not beneficial to their business.

If you liked this article, you may also find it interesting to read the following one:

Burn-Out and Runway What are they and why are they so relevant?