Valuation World Cup: Group C – (Customers)

There-is-only-one-boss

Today we get to know Group C, the metrics on Customers.  Much like the fans at a packed Estadio Das Dunas in Natal, Customers are the lifeblood and barometer of any successful company.  When things are going well they will cheer and drum and vuvuzela their support, yet when things are not going well they will boo and berate your squad as if there were no tomorrow.  In a company and in a soccer game, you want the former not the latter and these metrics can help determine whether your company will incite riots or show unwavering loyalty.

*Editor’s Note: Confused? Lost?  Head over to the Valuation World Cup Homepage for more information!

1. Churn

Explanation and Use Case
Churn is simply a measure of how many customers you are losing.  These are the customers that are not renewing contracts, walking away from upgrades, etc.  These are all problems you want to avoid because recurring customers can be the sweet spot for many companies.   Much like season ticket holders not renewing after a relegation year, poor performance can drag down your top line as well as accelerate the after-effects of losing your most-valued customers and the resulting diminished Net Promoter Score (NPS).

NPS-en

Pros and Cons
The true benefit of this metric is not so much how it helps you value your company on its own, but it really helps provide input into the health of your business and the happiness of your customers.  That, and it is a key piece on some of the other customer-centric metrics (we see you LCV).  The main drawback is that churn alone is not a key leader in the valuation world, yet it is a strong contributor on a lot of other aspects of the customer valuation types.  If customer valuation metrics is a soccer team, churn is a strong goaltender; it won’t win you any games, but it is absolutely vital to your success as a whole.

Example
RealData, a data analytics company, has 600 customers and only churns 5% of them over time.  They have $6M in Annual Recurring Revenue (ARR) and are valued at $24M.  Their competitor DataSlice also has 600 customers but churns 30% of them over time and only has $4M in ARR which has diminished their total value by $14M when compared to RealData.  Total Value $10M

2. Enterprise Value/Lifetime Customer Value

Explanation and Use Case
Lifetime customer value is a way to gauge how much a single account is worth over their life.  Think the total amount of revenue you would receive from season ticket holders over their lifetime purchase period (tickets, drinks/food, apparel, etc.) less any churn.  That can be a pretty powerful number when valuing a business, especially when customer acquisition costs are low. The rule of thumb for a strong LCV is it must be greater than 3x Customer Acquisition Cost (how much it costs to get a customer).  A low CAC and high LCV is like playing with Brazil in this year’s World Cup.  Absolutely stacked in player talent that will put on a great show for the fans game in and game out (high LCV) and it is already the most passionate country in the world for the sport (low CAC).

Pros and Cons
The main advantage of this metric is you know just how much to expect from each customer and can really take that into account when building out your sales team and corresponding metrics (deals per salesperson, new accounts needed, deal size expected, etc.). The drawback to this is that no customer is the same and making generalizations about your average customer can be dangerous.  If your original customers loved the product (high LCV) but that only happened to be a subset of the true population’s thoughts on your solution which were noticeably lower (lower LCV), then you would have overvalued your average customer.

Example
Ship.Ly a consumer facing on-demand delivery service was just valued at $10M and their customers have an LCV of $8K.  Door2Door, a competitor in the space looking to raise a round has an LCV of $10K. Total Value: $12.5M

3. Enterprise Value/Monthly Active Users

Explanation and Use Case
What is MAU? Simply ask WhatsApp what MAU is and they will have a few billion answers for you.  Monthly Active Users (MAU) is a hot metric these days for pre-revenue or fast growing consumer-focused companies because it allows companies to measure more than just how many visitors they get to their website/app by showing how many of them are actually using it on a regular basis. The ability to demonstrate strong active user growth is a great asset when trying to monetize or show meaningful traction.

Pros and Cons
MAU is like the Netherlands of the past few years. The ultimate Jekyll and Hyde metric/team. One day you are crushing Spain in the opening round and the next you are bowing out of Euro 2012 with an abysmal performance and no dignity.  Total Football or Total Humiliation.  MAU can be your best friend (re: WhatsApp) or your worst enemy (re: Twitter).  Active users do not necessarily mean future revenue and that is why MAU can be feast or famine in this day and age.

Example
WhatsApp was purchased for $19B with 450M MAU’s or 42x.  MessgMe is a SMS-based messaging service looking to raise a B round with 300K MAU’s. Total Value $12.6M

4. Market Share/Market Size

Explanation and Use Case
How big is the Total Addressable Market (TAM) and what portion of it do you expect to control?  Market size and expected share can be a great tool when determining the value of your company. Lots of questions can be asked and answered with this metric (Is it feasible that a company can be worth 100m when the market is 500m? 2bn?, etc.).  This can be valuable for pre-revenue companies or companies looking to greatly expand their customer base as it provides them context about what exactly they need to do to achieve the market share they desire.

Pros and Cons
If done properly, market share % goals can be extremely useful in setting a roadmap for the successful execution of the company vision.  The main drawback is that without other strong customer metrics to support the goal, it becomes an unreasonable assumption that will most likely go unachieved.  Much like team USA was laser focused in their preparation for their game against Ghana, calling it their “world cup final” even though it was only Group stage game 1 of 3, a company with strong metrics to back up their market share % goal (avg. deal size, LCV, churn, growth rate, etc.) can hopefully benefit from the fruit of their labor in similar fashion to USA’s outcome yesterday

Example
CapCo is looking to disrupt the men’s headgear business and take share from market leader HEADS.  CapCo currently owns 10% of the $1B market and expects to own 20% of the $1.5B market 5 years from now.  Total Value: $300M

Match to Watch

Which MAU team will you get this time around?  The behemoth or the doormat? Look to see how MAU can hold up against Lifetime Customer Value in what could be a pivotal matchup for 2nd place!

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6 thoughts on “Valuation World Cup: Group C – (Customers)

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