The metrics within this article are mandatory learning for every entrepreneur working in the startup world. They should be a natural part of the business process that is tracked and analyzed on a regular basis. They’ll show when things are going well, and importantly let you know if something needs your attention.
Why You Should Track Key Metrics Closely as a Startup
Tracking your metrics keeps you on the straight and narrow. It’s all too easy to fall into the trap of simply running from sale to sale and seeing just the revenue generated. In that scenario, businesses regularly question why they’re not growing, making more profit, or worse still, losing money. Often it is because they’re not tracking metrics that indicate business growth, or ones that can help highlight issues within the business.
5 Metrics Every Startup Should Be Tracking
There are a number of core metrics that you absolutely should be tracking as a startup. There are, in fact, considerably more than those listed below but at a minimum, these are the ones that every business needs to keep an eye on. They will show you how your business is faring and, importantly, if it is growing.
Customer Acquisition Cost
Customer Acquisition Cost, CAC, is one of many sales performance metrics that all startups need to pay attention to. Getting it wrong can derail the business before it even starts. CAC is a measurement of how much you have to invest to get a new customer to purchase from you.
If the cost is higher than your return then you’re in trouble and will be hemorrhaging money. If your CAC is lower than your return then you’re on the right track and should be seeing an uptick in profits.
To calculate CAC take all of your costs attributed to sales and marketing and divide them by the number of customers that are acquired from them (within a given period). It’s important that you include all of your expenses related to sales and marketing, including staff costs.
Chasing new sales is an easy trap to fall into, it’s exciting and it feels like instant revenue. The issue, however, is that often the clients who are currently working with you get forgotten about. Retaining those customers isn’t often a priority, especially for sales departments, but getting new business from current customers is far cheaper than acquiring new ones.
In order to measure the number of retained customers, especially in a subscription model, you simply compare the number of customers you have in a given period versus the number of customers in the following period (minus new customers). The smaller the number, the better.
Lifetime Value (LTV)
A self-explanatory metric, LTV is a measure of how much a customer is worth over their entire lifetime with your business. It’s an interesting metric to predict revenue and also gauge their worth against their CAC. Combining LTV and CAC gives a more holistic view of a customer’s worth.
To measure LTV you’ll need a number of different individual figures:
- How long they’re likely to work with the company for (their lifetime).
- How often is a purchase made?
- The value of those purchases
- The net margin on those purchases.
Then to calculate, you take the number of purchases in a month, multiply it by the value of those purchases (net) and then turn it into their lifetime by multiplying that figure by the average time left in their lifetime. This gives you the value that a customer has over their lifetime, but now you need to subtract their acquisition cost and any ongoing costs attributed to them. If you’re still in the positive then you’re making money from that customer.
Monthly Recurring Revenue (MRR)
If you’re a subscription-based business MRR per customer and as a whole needs to be tracked. Similar to LTV but on a more granular monthly basis. Take the revenue generated by each customer and subtract the running costs of that account. This should be a net positive. Tracking overtime allows you to see if you are losing or gaining customers.
Revenue Growth Rate
Comparing on a month-by-month basis, you’re able to find out your revenue growth rate by taking the revenue generated in a given period divided by revenue generated in the last period. Multiply by 100 to get a percentage. The result shows you how much your revenue is growing. For a scaling business, this should always be a positive figure.
These metrics are a good starting point, but they are exactly that, a starting point. The core metrics that you’ll need to focus on will vary from business to business, so take time to understand precisely what you need to know and build your own tracking metrics from there.
- Keep these metrics in a central place so that all stakeholders have access to them.
- Refer to them whenever you’re making major business decisions that could impact revenue, growth, and development.