Top 5 Metrics for App Due Diligence
Want to evaluate an app's performance before investing or acquiring it? Focus on these five key metrics:
- Revenue Growth: Tracks how well the app is scaling financially. Consistent growth backed by verified data is a strong sign of market traction.
- User Retention Rate: Measures how many users stay engaged over time. High retention reduces costs and indicates long-term value.
- Churn Rate: Shows the percentage of users leaving the app. Lower churn means better customer satisfaction and higher profitability.
- Lifetime Value (LTV): Estimates the total revenue each customer brings. A higher LTV signals greater long-term revenue potential.
- Customer Acquisition Cost (CAC): Calculates the cost of acquiring each new user. Balancing CAC with LTV is crucial for profitability.
Key Insight: These metrics work together to reveal an app's financial health, growth potential, and sustainability. Look for trends over time, compare them to industry benchmarks, and ensure data accuracy to make informed decisions.
Top 10 Mobile App Metrics & KPIs (Explained) 📈
1. Revenue Growth
Tracking revenue growth is a key part of due diligence because it reveals an app's market performance and its potential for future success. It provides a snapshot of both its current financial health and its ability to scale over time.
Steady growth over months or years - rather than occasional spikes - is a strong indicator of a scalable business model, especially when operating costs remain stable. For instance, a Software-as-a-Service (SaaS) company with a consistent 20% monthly revenue growth suggests solid market traction. Similarly, an app that doubles its annual recurring revenue (ARR) within a year, while keeping operating costs relatively flat, demonstrates the potential for high profit margins and scalability. However, these growth trends need to be backed by reliable data.
Verified revenue data plays a critical role in assessing these trends. Using sources like CatMRR ensures that reported growth reflects actual customer payments rather than inflated projections or adjustments. This level of accuracy is essential for understanding the true financial performance of the business.
Revenue growth also provides insight into product-market fit. Consistent increases suggest that users find value in the product, while stagnation might indicate underlying market challenges or concerns.
2. User Retention Rate
User retention is a key indicator of an app's ability to keep users engaged over time, offering a clear picture of whether people continue to find value in the product. While revenue growth is important, retention reveals the app's staying power in the market.
To calculate retention, divide the number of returning users by the number of initial users, then multiply by 100. For example, if 300 users out of 1,000 return, the retention rate is 30%.
Retention is typically measured at specific intervals - Day 1, Day 7, and Day 30 - to assess both initial appeal and sustained engagement. These milestones help paint a fuller picture of user behavior.
Retention benchmarks differ depending on the app's category and target market. Comparing an app's retention rate to industry standards is essential during due diligence to gauge its competitive standing.
Strong retention rates reduce the need for constant user acquisition, lowering costs and increasing lifetime value. This enables a shift in focus from merely replacing users to fostering growth.
Cohort analysis is a valuable tool for monitoring retention trends. By grouping users based on when they joined, you can evaluate how updates or changes, like improved onboarding, impact engagement over time. Positive trends signal effective strategies.
On the flip side, low retention often points to deeper issues, such as a lack of product-market fit. These challenges can't be solved with marketing alone and may indicate long-term risks - an important consideration during due diligence.
3. Churn Rate
Churn rate represents the percentage of users who stop using an app within a specific time frame. It’s a straightforward way to gauge customer dissatisfaction and can reveal issues like poor product-market fit or inadequate customer support.
"This metric shows the percentage of customers that stop using a product or service over a given period." - Ed Skiber, Member of Transaction Advisory Services Practice, GHJ
To calculate churn rate, divide the number of users lost during a given period by the number of users at the start of that period, then multiply by 100. For example, if you begin the month with 10,000 users and 500 leave, your churn rate for the month would be 5%. By examining churn from both user count and revenue perspectives, businesses can better understand customer behavior and identify problem areas.
Churn rate benchmarks vary by industry. For subscription-based apps, an annual churn rate below 5% is often considered strong and appealing to investors. In the mobile app space, a churn rate of about 2% signals high customer loyalty and a solid product-market fit.
A high churn rate can significantly reduce Customer Lifetime Value (LTV), making it harder to justify customer acquisition costs. Investors are drawn to sustainable business models where LTV greatly surpasses Customer Acquisition Cost (CAC). A persistently high churn rate, however, signals deeper problems that could require substantial resources to resolve.
Retention strategies play a key role in addressing churn. Research suggests acquiring a new customer can cost five times more than retaining an existing one. Additionally, improving customer retention by just 5% can increase profits by 25% to 95%.
To go a step further, predictive analytics can enhance retention efforts. By analyzing user behavior and engagement trends, predictive tools identify customers likely to churn. This allows businesses to take proactive steps, such as targeted offers or personalized outreach, to keep users engaged and improve long-term performance.
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4. Lifetime Value (LTV)
Lifetime Value (LTV) is a metric that estimates the total revenue and profit a customer is expected to bring throughout their relationship with your app. It offers a clear picture of long-term profitability .
To calculate LTV, you’ll need metrics like ARPU (Average Revenue Per User), customer lifespan, retention rate, and associated costs. For instance, if your app generates $50,000 monthly from 10,000 users (giving you an ARPU of $5) and users typically stay active for 24 months, the LTV would be $5 × 24 = $120 per user.
Why is this important? LTV helps you decide how much you can reasonably spend to acquire and retain users. If your LTV is higher than your Customer Acquisition Cost (CAC), your business model is not only sustainable but also has room to grow. This ties back to earlier discussions around churn and retention, showing how crucial it is to balance acquisition costs with the value users bring over time. Additionally, LTV helps identify your most valuable users and aids in revenue forecasting, making it a central metric for assessing an app's overall health.
Benchmarks for LTV vary depending on the monetization strategy. Subscription-based apps usually boast higher LTVs because of their recurring revenue streams, while ad-supported apps often depend on a larger user base to achieve profitability.
Ultimately, LTV underscores an app's ability to generate steady and predictable revenue over time, which is a major draw for investors looking for long-term growth potential.
5. Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) measures how much you spend on marketing and sales to bring in each new user. It’s a key metric for understanding how efficiently you’re acquiring customers, especially during due diligence.
"It includes all marketing and sales expenses over a specific period divided by the number of customers acquired in that period." – FasterCapital
For example, if you spend $100,000 on marketing in a year and gain 1,000 users, your CAC would be $100 per user.
When calculating CAC, make sure to include all relevant costs - advertising, salaries, promotional materials, commissions, and any other marketing or sales-related expenses.
Breaking down CAC by acquisition channels is also crucial. This allows you to identify which channels are the most cost-effective, helping you allocate resources more efficiently. These calculations are especially important when assessing the LTV-to-CAC ratio.
The Key LTV-to-CAC Ratio
The Lifetime Value (LTV) to Customer Acquisition Cost (CAC) ratio is a cornerstone of sustainable app growth. A ratio of 3:1 or higher is often considered a good benchmark, meaning your app generates three times the value from each customer compared to what it costs to acquire them.
"A company with an LTV:CAC ratio of 3:1 is generally considered healthy, as it suggests that the value derived from a customer is three times the cost of acquiring them." – FasterCapital
If your CAC grows too high compared to LTV, your business model risks becoming unviable. Timing is also critical. For instance, even a strong 5:1 ratio can create cash flow issues if it takes more than 24 months to recover the acquisition cost, as this ties up capital for extended periods.
As your app scales, these metrics may shift. CAC often rises as lower-cost channels get saturated, forcing reliance on more expensive methods. On the other hand, LTV can increase through strategies like adding new features, improving retention, or leveraging network effects.
Segmenting users by acquisition source can provide deeper insights, helping you identify which channels consistently deliver the best LTV-to-CAC ratios.
Ultimately, a strong LTV-to-CAC ratio demonstrates that your acquisition strategy supports sustainable growth. It reassures investors that you can scale profitably while maintaining long-term viability and growth potential.
Conclusion: Using These Metrics for Better App Evaluation
Metrics like revenue growth, retention, churn, LTV, and acquisition cost offer a clear window into an app's performance. However, their real value lies in analyzing them together. For instance, strong revenue growth paired with high churn and soaring acquisition costs might indicate shaky sustainability. On the other hand, steady revenue growth alongside high retention and a solid LTV-to-CAC ratio could signal a more reliable investment.
Timing also plays a crucial role in interpreting these numbers. Metrics like monthly recurring revenue can fluctuate due to seasonal trends, retention rates often stabilize after the initial months, and acquisition costs may swing depending on market dynamics and competition. Looking at trends over time - rather than focusing on a single month or quarter - provides a more accurate picture.
Accurate data is the backbone of meaningful evaluation. Verified data minimizes guesswork and ensures your analysis reflects actual performance. Context is equally important. For example, a 15% monthly churn rate might be alarming for a productivity app but perfectly reasonable for a gaming app. Similarly, acquisition costs that seem high at first glance might make sense when weighed against lifetime value and payback periods.
Segmentation can uncover hidden insights that overall metrics might miss. Breaking data down by user demographics, acquisition channels, or subscription tiers often reveals trends that aggregate numbers obscure. An app might show strong overall performance but struggle within specific user groups or markets.
Metrics also shift as apps mature. Early-stage apps often focus on growth, even at the expense of profitability, accepting higher acquisition costs to capture market share. Established apps, however, tend to prioritize optimizing metrics like LTV-to-CAC and improving retention. Recognizing where an app is in its lifecycle helps set realistic expectations for its performance.
Ultimately, a well-rounded evaluation combines these metrics with broader strategic factors. Numbers tell part of the story, but market trends, competitive positioning, and the development team's track record also shape an app's prospects. For example, strong metrics in a declining market category carry different weight than the same metrics in a growing sector. Use these metrics as a starting point for deeper analysis, not as the sole decision-making criteria. By combining verified data with a systematic approach, you'll be better prepared to make smart decisions in the competitive app marketplace.
FAQs
What steps can I take to ensure the data used for evaluating app performance metrics is accurate?
To make sure your app performance metrics are based on accurate data, begin by checking the source. Choose trusted analytics tools and double-check that they’re correctly set up to avoid tracking mistakes. Whenever possible, compare data from multiple sources to spot any inconsistencies.
It’s also a good idea to regularly review your data collection methods to ensure they match your current business needs and objectives. Don’t forget to clean up your data by removing duplicates or irrelevant entries that could distort your results. By sticking to consistent validation practices, you can confidently rely on your metrics for making informed decisions.
What are the best ways to boost user retention and lower churn rates for an app?
Improving user retention and cutting down churn rates calls for a well-thought-out strategy centered on delivering value and creating a seamless user experience. Start by diving into user behavior data to pinpoint areas where users might be struggling or features that keep them coming back. Use these insights to fine-tune your app’s design, navigation, and overall functionality.
Personalization can make a big difference - think tailored recommendations, custom notifications, or exclusive incentives that align with individual user preferences. Keeping the lines of communication open is just as important. Regular updates through in-app messages or emails can help keep your audience engaged and remind them of your app’s value. And don’t underestimate the power of fast, effective customer support. Resolving issues quickly can go a long way in building trust and loyalty.
For an extra layer of engagement, consider introducing a rewards program or offering special perks for long-term users. When you consistently meet - or better yet, exceed - user expectations, you create an environment where people want to stick around, reducing churn in the process.
What is the ideal LTV-to-CAC ratio for my app, and how can I improve it if it’s not where it should be?
The ideal Lifetime Value (LTV) to Customer Acquisition Cost (CAC) ratio for your app is generally around 3:1. In simple terms, this means that for every dollar you spend to acquire a customer, you should aim to generate at least three dollars in revenue from them. If your ratio dips below 1:1, it’s a red flag - you’re spending more on acquiring customers than they’re bringing in. On the other hand, if your ratio is too high (like 5:1 or more), it could mean you’re not investing enough in growth opportunities.
If your LTV to CAC ratio isn’t where it should be, here are a couple of ways to address it:
- Boost LTV: Focus on keeping users engaged longer, offering premium features, or introducing subscriptions to increase the revenue each customer generates.
- Reduce CAC: Fine-tune your ad campaigns, target audiences more precisely, or lean into organic strategies like content marketing to cut down acquisition costs.
Keeping a close eye on these metrics is essential to ensure your app stays both profitable and competitive in the long run.