The rate at which a business model acquires monetizable value from its users is known as traction. The correct traction indicator should indicate business model expansion. To put it another way, traction is the result of a successful company plan.
While it is true that a company must first generate value for their consumers before they can capture value from them, capturing value is what actually makes the business model function.
In very simple terms, it refers to the growth or momentum that a company has gained through time while keeping in mind its potential clients.
Why is it important?
Everyone understands that businesses are based on cash and money is essential in scaling a firm. But when companies don’t have funds to scale or expand, they’re likely to look at external sources to raise investments. But to really sell a business and its viability, founders need to be able to show some solid business metrics to investors. It’s the only way for them to stand out from the countless number of proposals investors receive on a daily basis.
As a result, traction is critical and required because it validates the viability of a concept.
All stakeholders in the company, including the founders and employees, value traction. It’s especially crucial to investors who want to invest their money and expertise into a firm that has the potential to develop.
Which is why, an entrepreneur needs to prioritise and make obtaining traction a primary goal. They need to test and iterate ideas and hypothesize about consumer demand and behaviour until they come up with a commercially viable business model.
In simpler terms, as an entrepreneur, your main responsibility is to make sure that the product and the market are a good fit in order to obtain traction.
Essential Traction Metrics
1. Customer Acquisition Cost (CAC):
In a nutshell, this is the cost of getting a new customer. Since customers are the ones who generate income, customer acquisition cost (CAC) is one of the most crucial growth indicators for a firm in its early stages. For a firm to determine CAC, they should choose a certain time period, such as a quarter, and divide their marketing and sales costs by the number of customers they gained during that time period. Obviously, the lower the client acquisition cost, the better. Nevertheless, it’s completely normal to have a high CAC initially while firms are attempting to gain awareness; the difficulty is to reduce CAC thereafter to the point where it becomes profitable.
2. EBITDA Margin:
Earnings before interest, taxes, depreciation, and amortisation (EBITDA) are calculated as a percentage of total revenue to determine a startup’s operating profitability.
EBITDA Margin is calculated by dividing total EBITDA by total revenue. EBITDA Margin is a popular metric used by investors to determine how successful a firm is. EBITDA Margin also reveals how lean a business is in proportion to its sales.
In general, the average product-based company’s EBITDA margin is around 12%, while the average service-based company’s EBITDA margin is around 18%.
3. Viral Coefficient:
This measure is used to track a firm’s organic progress. Firms usually start with WOM recommendations when launching a new product, encouraging close family and friends to use it, share it and recommend it, resulting in healthy, organic, word-of-mouth marketing. Using social media to reach a larger audience is another option. Companies will need their original number of customers (before they start sharing it), the number of invites given to potential customers, and the percentage of consumers obtained through those invites to calculate the Viral Coefficient. The Viral Coefficient will show companies if their product has a positive response and, as a result, if it will be lucrative in the long run. It will also assist them in managing ROA, i.e. Return on Advertising.
4. Return on Advertising:
Though word of mouth is indeed the easiest and cheapest way of advertising, getting people to actually talk about a product is difficult. Startups definitely need to set aside an advertising budget to promote their product, raise awareness amongst the right audience, and generate sales. To calculate ROA, simply divide the number of sales that came from the advertising budget over a period of time.
JPIN helps identify the most essential traction matrices that will help businesses grow at an exponential rate along with identifying areas for improvement, which in turn will lead to a higher cost-to-productivity ratio and make businesses develop with vigour and good morale.
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