Let's take a look at four metrics that are specific to B2C or DTC companies. The conversion rate measures the percentage of potential customers that visit a company's website or e-commerce store and perform a desired action. The action is often the purchase of the company's products, but it could also be another action like signing up for the company's monthly blog.
The conversion rate includes customers who visit the company's e-commerce store and make a purchase before leaving, or it could also apply to customer trial periods when a customer converts to a paid user once the free trial is up. There are different modifications to the conversion rates, such as new customer or returning customer conversions. VC fund investors focus on this metric to help them assess level of market demand and determine the effectiveness of a marketing or advertising strategy. The conversion rates can be compared to industry standards, product expectations, and target goals.
Average order value or AOV tracks the total dollars spent by a single customer or a group of customers per number of orders.
Focusing on increasing AOV should directly increase margins.
VC fund investors will evaluate AOV trends and determine the effectiveness of the company's user marketing strategy.
AOV can be modified to measure new customers repeat purchases, and through the life of the customer.
To calculate the company's average order value, simply divide total revenue by the number of orders. AOV is determined using sales per order, not sales per customer. For example, let's say that in the month of September, the web store sales were 31,000, and you had a total of a thousand orders. 31,000 divided by 1000 gives you $31. So September's monthly AOV was $31.
The net promoter score, or NPS is a survey measure used to gauge customer loyalty, satisfaction, and enthusiasm for a company or a brand, and it's calculated by asking customers one question. On a scale from zero to 10, how likely are you to recommend this product or company to a friend? Tracking aggregate NPS scores over time can assist companies in evaluating any improvements the company has made to customer experience. VC fund investors can compare the NPS to the industry competition or internal targets. To calculate the NPS subtract the percentage of detractors from the percentage of promoters. For example, if 50% of respondents are promoters, 10% are detractors and 40% are passives. The NPS would be 50 minus 10 or 40. In this case, net revenue retention or NRR measures the percentage of net revenue retained from existing customers at the start of the period after adding expansion revenue and deducting churn over the period, typically monthly or annually.
This measure is especially relevant for a DTC subscription model. As a target benchmark an NRR over a hundred percent is positive and implies a satisfied customer base with recurring revenues from existing customers greater than churn.
To calculate NRR over a monthly period, we take the monthly recurring revenue at the start of the month. We add expansions and upsells. We deduct the churn and contractions, and then we divide this number by the MRR at the start of the month.
Net revenue retention is the single best leading indicator of whether a SaaS company's revenues will grow or hit a ceiling. Recurring revenue businesses are highly sensitive to churn. If customers subscribe and then turn out the business revenues will automatically decrease over time.
