Tuesday, 30 December 2014

The Most Important Metrics for Internet Businesses

In the internet economy - be it a web 2.0 Or the App industry, one of the most important metrics determining a firm's value is: "Customer Lifetime Value" (CLV). CLV is the value generated by a customer while using the app (or website) that is in turn captured by the website or the app. Another metric of importance is the customer acquisition cost (CAC). CAC is the cost of acquiring a customer through either advertisements, referals or through regular sales cycle.
One of the ways to calculate the CLV is as follows: (A more detailed definition and formula for the same is given here.)
Customer Lifetime Value (CLV) = average sale value x number of repeat transactions x average retention time.
For example, let's say that a Netflix customer uses the service for 5 years (average retention time) and pays $8 per month (average sale value) and 12 times a year ( i.e. number of repeat transactions). The customer lifetime value for Netflix is 5 X 12 X 8 = $480.
If Netflix spends $80 to acquire one customer on average, the net realizable value from a customer is:
CLV - AC ie. $480 - $80 = $400 per customer per year
Obviously the more the number of customers the higher is the firm's revenue. The net realizable revenue for Netflix with 40 million customers is 16 billion dollars over 5 years. For services that are dependent on advertisements e.g. news sites or Google, the average sale value is dependent on the average number of times a customer clicks on an advertisement (CPC ads) OR the number of times an advertisement can be displayed to the customer. 
1) The number of repeat transactions: This is achieved by increasing a customer's time spent using the app (or the website) by making the site's value proposition very compelling. In addition high repeat transactions are achieved by making customers engage in actions such as clicking ads or browsing or purchasing digital goods.
2) The retention: This is achieved by making it very difficult to leave the application or the platform AND by making the user return to the platform over and over again.

Overall, if an internet business increases the number of repeat transactions and increases the retention of customers while simultaneously increasing the number of customers, their business will get very valuable quickly - like Whatsapp..


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