What investors should be looking at
- What is the level of customer retention, and has it been increasing or decreasing over time?
- How many one-and-done customers does the business have, and is there a risk that it will work through its entire target audience in the near term?
- How big a loyalist base is the business building?
- Have any changes to the business (e.g., new product launches) had an impact — be it positive or negative — on customer retention?
Average order value (AOV)
- Has the business maintained or increased AOV?
- Has it been successfully increasing its basket size and cross-selling new products?
- What is the potential for it to increase AOV through new product launches and additional cross-selling?
- Has the customer base been increasing its number of orders per year?
- How might (or has) a subscription model or new product launch increase(d) order volume and in the process, improve(d) retention?
However, while assessing these metrics over time will provide a picture of a business’s overall health, to make that picture even more complete, investors should also be applying them to the following areas:
Business segments. Different parts of the business, such as different brands or geographies, may have different stories attached to them, which can help make clear which parts to prioritize — or deprioritize — for growth.
Cohorts. Analyzing these metrics across cohorts (e.g., the number of new customers in each subsequent year) can cast light on the changing quality of newly acquired customers. For example, it can make clear whether the customers acquired during COVID-19 were low-quality given how much more time consumers were spending shopping from home and seeing ads on social media, or whether the business’s current target pool is running out of high-quality consumers.
Customer segments. It is frequently possible to segment a business’s customer base to isolate the more valuable customer segments, which can then be translated into a more targeted customer acquisition strategy. It may also bring to light any customer satisfaction issues related to certain products (e.g., products targeting consumers with certain types of skin or hair needs).
Analyzing these metrics will enable investors to better evaluate whether management’s revenue projections make sense by applying forward modeling to the trends seen in the data. Doing so often reveals that revenue will in fact fall far short of those projections unless the business can acquire and retain a significantly higher number of new customers than management’s current model lays out.