Part III: Drivers of the Core Ratio – Retention, Margin, Acquisition

  • July 30, 2018

Often, entrepreneurs need to ask more detailed questions, such as ‘How did our new feature improve the business?’ or ‘Why is the cohort from January outperforming other cohorts?’. This is where we drill down into the three fundamental drivers of the underlying economic engine:

  1. Margin

The ratio of marginal costs to revenue: ‘What is the revenue and cost of selling one more unit?’. Examples of line items we would include in the margin are the cost of product, shipping costs, payment processing costs, returns, customer support, retention marketing, server costs and packaging.

2. Sales and marketing efficiency

There are a number of ways to dive deeper into sales and marketing efficiency, from the magic number to Customer Acquisition Cost (CAC) and many more. We usually look at fully loaded spend in order to maintain comparability across businesses but marginal spend can be more accurate for early startups with high fixed (salary) costs.

3. Retention

Revenue retention takes into account upsell to existing customers as well as customers decreasing their spend or churning altogether. We look at this data by cohort and over time.


 

Written by: Thomas Gieselmann and Jonas Nelle

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