Running a startup can be like a rollercoaster ride at times. It’s hard to predict what’s going to happen, there’s a ton of excitement, fear, coupled with sharp twists and turns.
The risk, adventure, and opportunity to add value is what drives entrepreneurs to embrace the startup life.
Fortunately, setting and measuring metrics based on startup goals prevents the rollercoaster ride from spinning out of control. The right metrics ground your business decisions in logic, gauge the health of your startup, and play an important role in attracting and persuading investors.
But what are the right metrics for judging your startup’s health? And how are those metrics translated by potential investors?
Keep reading to find out…
How Healthy Is Your Startup Right Now?
Everyone and their dad has heard about KPIs: Key Performance Indicators. It’s a common acronym that gets thrown around in the startup world that’s basically a “businessy” way of saying “important metrics for tracking your business”.
Before you begin talking to investors – or making serious startup decisions – it’s important to know where your startup currently stands. Is it attracting customers but failing to retain business? Is it starved of leads?
You’ll only know if you track.
There are a ton KPIs you can track, but below are the most important for reviewing the health of your startup:
Monthly Recurring Revenue (MRR)
Monthly Recurring Revenue, or MRR, is a measure of the predictable and recurring revenue of your startup. This doesn’t include one-time and variable fees.
For SaaS startups, MRR is the most critical metric. It’s what makes the subscription model awesome. However it comes with it’s own set of challenges, like retention and churn.
To accurately calculate MRR, you need to consider these three different aspects:
● New MRR
Fresh revenue brought by newly acquired customers.
● Expansion MRR
Expanded revenue from existing customers, usually from upsells and cross-sells.
● Churn MRR
Churn MRR refers to lost revenue from customers leaving.
So, Net MRR = New MRR + Expansion MRR – Churned MRR
Customer Lifetime Value (CLV)
Customer Lifetime Value simply measures the profit your business makes from any given customer. Knowing your CLV will help answer pivotal questions like:
● How much can I afford to spend acquiring each new customer?
● How much can I spend on retaining customers and reducing churn?
● What upsells and cross-sells can be given to the best customers?
You need the following three variables to get your customer lifetime value:
● ARPA (Average Revenue per Customer/Account)
● Gross margin
Take the revenue you earn from a customer, subtract the money spent on acquiring and serving them, and see how long they generate profit before churning.
LTV = ARPA * % Gross Margin / % MRR Churn Rate
Customer Acquisition Cost (CAC)
Acquiring new customers can be costly, and that’s why tracking CAC is so important. Because pumping hard-earned money into a marketing channel with negative returns will kill your startup.
Customer Acquisition Cost refers to the resources that a business uses in order to acquire an additional customer. It encompasses all efforts necessary to get your products and services into the hands of potential customers, and then convincing them to buy.
Common acquisition expenses are: paid ads, staff salaries, CRM, marketing automation software licenses, sponsorships, content marketing, and social media.
Knowing your CAC will help you with:
● Determining your actual profit margins
● Optimizing Customer Lifetime Value
● Identifying and optimizing the biggest acquisition expenses
Calculating your CAC
To calculate your CAC, take your total sales and marketing expenses over a given period of time; then divide by the number of new customers acquired in the same period.
This is the number of customers you lose in a certain time period. Simply put, it is how many customers stop paying for your product or service.
Not to be confused with customer churn, revenue churn represents lost revenue numbers caused by customers that have churned.
Metric Decomposition – Making The Most Out Of Your Metrics
Tristan Handy, from the RJ metrics blog highlights a great analysis process for making the most out of your KPI data. If you want to drill deeper into your metrics to unearth diagnosable problems:
1. Choose a small number of metrics that matter the most for your business. This will vary for each startup.
2. Take your top level metrics and break them down into component parts. For example, Tristan broke down net new customers into new customers, churned customers, and debooked customers (customers who never were successfully onboarded).
3. Repeat step 2. Carry on breaking down your metrics into their component parts until you’ve reached the point of diminishing returns.
“This process leads you to a model that allows you to ask “why did we succeed?” or “why did we fail?” for any of your top level metrics, and then trace that success and failure into each component metric to diagnose problems.”
Some great tools for tracking your KPIs are:
Vanity Vs. Actionable Metrics
Quick question: Are the metrics you’re tracking helping make decisions?
If not, stop tracking them. Because you’re probably measuring feel good metrics that don’t mean squat. They’ll spin your startup’s wheels, instead of propelling it towards success.
“Vanity metrics are all those data points that make us feel good if they go up but don’t help us make decisions.” – Lars Lofgren” Kissmetrics
So what do startup killing vanity metrics look like?
I repeat: If you’re measuring metrics that don’t influence startup decisions, you’re tracking a vanity metric.
Think about…are investors likely to be swayed by your 2000 likes on each Facebook post, or the fact that the customers are spending more time engaging with your startup and have been referring you twice as much?
Before you begin preparing a list of metrics to track, be sure to exclude the following “startup killers” from your list…
You rack up an impression every time someone “sees” your ad; and it’s easy to rack up thousands, which is what makes them a popular vanity metric.
Those high numbers make you feel good, but are they useful? Not really. Some Ad impression programs even mark impressions every time a page is loaded, which is utterly useless because you can’t even tell if someone even looked at – or interacted with – your site.
Tracking impressions is silly, a smarter choice would be to look at the clickthrough rate on your ads. Because it’s an action based metric that indicates how interested people are in your startup.
Likes, Shares or Tweets
Great, your post about innovation scored 1000 shares, but does it tell you anything about acquiring new customers? Or why your Monthly Recurring Revenue has plummeted?
Social media shares and likes show that your audience is interested in your content.
And let’s face it, posting a random statement and having hordes of people instantly like can feel awesome.
But like most vanity metrics, they these metrics fail to inform any practical startup decisions. Which crosses them off the startup metric tracking list.
Page Views, Downloads, Traffic
These metrics are easily manipulated, and rarely relate to numbers that actually matter.
So what if you have downloads, who’s using, and for how long? Are they even coming back? Do they refer you to other potential users? What really matters are users, engagement, the cost of getting new customers, and ultimately revenues and profits. Simply because they’re more actionable.
Concluding Points On Maintaining Smooth, Operational and Updated Metrics
1. Only track relevant startup metrics that inform decisions – Metrics and KPIs should be tied to strategic goals and supported by executives, managers, and employees at every level.
2. Measure regularly – How often will vary on the metric and may range from daily, to weekly, or even monthly and hourly. It all depends on how critical certain metrics are for startup success.
3. Make dashboards relevant to those responsible – Different departments may view the same metric, but their actions will differ depending on the goals of their job roles. Ensure that everyone can understand desired actions based on each metric.
4. Keep dashboards simple – Colorful charts and beautifully pixelated graphs and visuals may seem tempting, but don’t get caught up. Remember, vanity is something to avoid. Simplicity is the key to quickly delivering information and prompting action.
5. Give context – Tracking actual performance against goals or historical averages gives insight to users and enables better decision making.