As M&A advisors with a focus on internet business, one of the most common questions we get asked is “What are the key metrics I need to be aware of going into a transaction?” Often times, the Key Performance Indicators (KPIs) founders focus on day to day are not the same as what a buyer or an investor will be digging into. If you think broadly about what makes a successful Internet business, it really comes down to two key areas: traffic acquisition and monetization/long-term value (LTV) of your customers. At the highest level, every Internet business should strive to minimize the cost associated with acquiring traffic and maximize the monetization associated with that acquired customer. There are many metrics associated with both traffic acquisition and monetization that buyers/investors are interested in and we have distilled them into the most important metrics below. Please note the list below is comprehensive so some metrics might be applicable to only eCommerce businesses where others are applicable only to lead generation.
- Traffic Channel Breakdown: Pertains to how customers find and navigate to your website. The entrepreneur should have a good grasp of Unique Visitors, Visits, Page Views and Time on Site for each traffic channel, not just the aggregate. In general, the more traffic you can generate from free/low-cost sources (Organic Google Traffic, Direct type-in), the better. Having direct type-in traffic represent a significant portion of a site’s traffic portfolio is universally viewed as a positive because not only is it free, but it means you have established a brand in the minds of consumers. Additionally, direct type-in traffic is insulated from the whims of a major search engine changing its algorithm, which provides buyers/investors with a measure of confidence in the sustainability of your site. Organic search engine traffic (SEO) also is attractive because of the minimal cost associated with driving an incremental visit. This brings us to paid traffic (PPC, Affiliates, List rentals, etc.) which is a whole different story. While it may be the quickest (and most expensive) way to scale your site, buyers/investors want to know that the company can scale its traffic base, and thus revenue, without having to incur significant traffic acquisition costs over the long-term. There is always a diminishing return on paid traffic (given the market nature of bidding) and at some point the bid to acquire a new customer will exceed the LTV of that customer coming to your website (see Groupon). If a website is dependent on paid traffic to generate site visits, at some point this will limit the profitability potential and ultimate potential scale of the business. Ideally, an entrepreneur will have exposure to all traffic channels with heavier contributions from direct and SEO traffic.
- Repeat Visitor Rate: Breaks down the traffic to your site between someone who is visiting for the first time and someone who has visited before. Whether a content-focused site or an eCommerce business, it is crucial to have a loyal audience/customer base. Not only do repeat visits typically come from a low cost source (direct, searching for your site name in Google, or bookmark), they also show that you are providing enough value to your audience that they return regularly.
- Customer Acquisition Cost (CAC): Simply put, this is the amount of money you need to spend to acquire a customer (Marketing Spend / # of Customers = CAC). For example, if you are an online news site that charges users for a subscription and spent $10,000 in paid marketing which resulted in 15,000 subscribers your CAC is $0.66 ($10,000 / 15,000). This helps buyers/investors predict the outcome of the potential marketing dollars they are going to provide you as well as proves you are data-driven in your approach to marketing.
- Long-term Value (LTV): The amount of revenue you can expect from one customer over a long period of time (typically 24 – 48 months). LTV is arguably the most critical of all metrics for buyers/investors. By understanding how much you can expect to make off a single customer you can then match that to CAC and adjust the amount you are willing to spend to acquire a customer. Additionally, LTV provides insight into the “stickiness” of your site and your ability to continuously provide value to your customers.
Please also see our post on Key Metrics in a SaaS Transaction.
If you have any question or comments about any of these metrics please do not hesitate to contact Jeff Koons at firstname.lastname@example.org.