Metrics aren’t about vanity. They’re about monitoring what’s working and what isn’t so you can adapt and evolve as you go.
“Mistakes will not end your business. If you are nimble and willing to listen to constructive criticism you can excel by learning and evolving.” – Meridith Valiando Rojas
Here are our top 4 startup growth metrics that every new business should measure in order to track growth and protect their success.
Read on to learn about the 4 key startup growth metrics as well as:
- Which metrics to get started with
- Why you need them
- How to calculate them
- How they fit with other metrics
Let’s dig in.
Never lose sight of the fact that cash flow is king. If you’re not making money, well, you don’t have a viable business. That starts with keeping a close eye on how much money is actually coming in; and, whether that’s going up or down.
As a metric, revenue is simple – it’s your total sales or invoice value for a given period. The time frame you use depends on your type of business, though.
If you offer a subscription-based service, for example, it will be much more meaningful to calculate this monthly, as it gives you a clear idea of whether sales are growing.
If this sounds like your business model, you should be sure to measure your Average Revenue Per User (ARPU) on a monthly basis, too. This divides your monthly revenue by your total number of users, so you can tell how much each customer is worth to you and which subscription drives or deals prove most valuable. Learn more about that here.
If, on the other hand, you sell high-value products or services, work with a relatively small roster of clients, or work on big consecutive contracts, it will likely make more sense for you to focus on your quarterly or even yearly revenue. Otherwise, you could end up with misleading or unhelpful values that make it look like you’re struggling when you’re actually working on a huge contract that can’t be billed until the end.
That said, if you do fall into the latter category, it can be helpful to check in on revenue metrics at smaller intervals. This is because, if your bigger contracts mean you have whole months where you’re not billing, you could be facing serious cashflow problems. After all, in the meantime, you still need to pay regular salaries, operational costs and so on.
Getting on top of the figures will alert you to potential problems on the horizon, so you can start to figure out possible solutions. For example, asking clients to pay a percentage upfront for big commissions, or breaking down hefty projects into smaller, billable chunks.
2. Customer Acquisition Cost (CAC)
This is one of the startup growth metrics that measures how much it costs your business to bring in each new customer. You calculate it by taking the total sales for a particular time period, subtracting your marketing expenses (salaries, tools, spend, etc) for the same period, and then dividing by the number of customers you acquired during that time.
For this metric to be truly meaningful, you need to cross-reference it with your Customer Lifetime Value (LTV). The LTV tells you how much revenue you bring in from each person over the entire time they remain your customer.
Ultimately, for your business model to be successful, you need your LTV to be substantially higher than your CAC. However, for early-stage startups, there’s a high chance that won’t be the case – and you don’t need to panic.
Remember this is a lifetime value, so if you’re just starting out you wouldn’t have had time to recoup your investment in every customer just yet. Plus, you may have splashed out on all kinds of marketing tools and platforms, or on expanding your team, and it will take a while for this to even out.
Just keep a very close eye on this metric as your business matures; and, work on keeping it below your LTV. Learn more about calculating your CAC here.
3. Customer Retention Rate
Monitoring (and improving) retention is vital because it costs so much more to bring in a new customer than to resell or upsell to an existing one.
This means that focusing on retaining and upselling to your current customer base will be more valuable than attracting new ones.
Here’s a formula you can use to calculate your customer retention rate over a particular period; be that monthly, quarterly or otherwise:
A = How many customers you have at the start of the period
B = How many customers you have at the end of the period
C = How many new customers you onboarded during the period
Customer Retention Rate (CRR) = ((B-C)/A) x 100
Learn more about calculating and improving your customer retention rate here.
Alternatively, you could look at your Churn Rate, which tells you how quickly you shed customers. Pay attention to the trend as well as the absolute value. Learn more about Churn Rate here.
4. Operational Efficiency
This calculates the ratio between your selling, general and administrative (SGA) expenses and your sales figures. It’s incredibly important because it essentially reveals whether the cost of running your business is comfortably higher than the revenue you bring in.
There are a few different ways you can calculate this (more on that here). The simplest way is to divide the total of all your outgoings for any given period by the total revenue for that period.
Related metrics include Gross Margins (your sales revenue minus the cost of goods sold, or COGS, which tells you how much money you keep hold of for each pound you earn in sales) and Burn Rate (how soon you’ll run out of money, at what point you’ll break even, and when you’ll become profitable).
There you have it: 4 key startup growth metrics to get you started. Just bear in mind that monitoring and assessing how these factors interplay is just as important than tracking them individually. Viewing them side by side will give you a complete picture of the health of your business.