Identify, evaluate, improve and repeat!
— Business metrics that startup founders must know —
Running a business is no small feat, ask a startup founder!
While the founder dons many hats, the responsibilities are usually split among the founding team. When the whole team is aiming towards the business goals, it’s important to assess the progress and milestones periodically.
Every successful entrepreneur out there has a good grasp of the financial metrics that really matter to her and how they should ideally change over time. And a lot of business failures can be attributed to the team’s negligence towards important business metrics or Key Performance Indicators (KPIs).
When we review stories of promising startups who couldn’t step up in their execution, a common thread that ties their failures is that they didn’t define and track metrics early on. The foresight that would have helped them measure the performance and health of the business.
As a founder there are some metrics (KPIs) that you must keep checking regularly to identify and avoid problems in your business.
Here are a few metrics that every startup CEO should track to grow and run their business successfully. The ones mentioned below are more geared towards new-age technological businesses, some of which might not apply to other industries or business models.
Operational Metrics
LTV — Lifetime Value Customer
LTV is the revenue that you can generate from the customer throughout their membership span. This metric is useful for subscription-based startups. This metric lets you know how much you can earn from a customer and once you know how much you earn from a customer then you can decide how much you can spend to acquire a new customer.
LTV = Average monthly revenue per customer * Average customer lifetime
CAC — Customer Acquisition Cost
CAC is a cost that you spend to acquire a new customer. CAC includes your spending on marketing, sales, and distribution. CAC will be high while launching the new product or service and once you understand the target market and your customer’s behavior you can adjust it according to your strategy.
CAC = Total sales and marketing expenses/ New customers acquired
Churn rate
The rate at which you are losing your customers (canceling subscriptions or not repurchasing). If your churn rate is high, then it means you either need to improve your product and services or you need to lower the pricing to retain the customers. On the other hand, if your churn rate is low then it indicates that your product or service is liked by the customers and you can charge a premium price to your customers.
Churn Rate = (Total customers churned in the period/ Customers at the beginning of the period) * 100
Customer retention rate
Customer retention is exactly the opposite to churn rate which depicts the number of customers you can retain out of your total customer base. High customer retention means customers are happy with your product and services.
Customer retention rate = ((Customers at end of the period — Customers acquired during the period)/Customers at the beginning of the period) * 100
Burn Rate
Burn rate shows you how quickly your start-up is spending money. This KPI will help you determine how much cash your business needs to operate and expand. This includes all the cash expenses incurred by the company. Usually burn rate is calculated monthly.
Burn Rate = Total cash at the start of the month — Total cash at end of the month
Cash Runway
Cash runway tells you how long you can run your business with the money that you currently have. It helps you to decide whether you need to raise funds to further grow/sustain the business.
Cash Runway = Total Cash balance/ Monthly burn rate
Now that you’ve understood all the necessary operational metrics it is also essential to understand a few financial metrics that are important to understand while running any startup.
Some metrics related to Revenue
· MRR (Monthly Recurring Revenue) — For a subscription-based business model where users have to make monthly payments that are recurring in nature is determined by MRR (Monthly Recurring Revenue).
MRR = number of subscribers in a month * Average Revenue Per User
· ARR (Annual Recurring Revenue) — ARR is similar to MRR, As MRR calculates monthly recurring revenue, ARR calculates annualized recurring revenue.
ARR = number of subscribers in a year * Average Revenue Per User
Sometimes, for high-growth startups, ARR is also calculated as MRR * 12
· ARPU (Average Revenue Per User) — How much revenue you generate for every customer you acquired is determined by using ARPU.
ARPU = Total Revenue/ Number of subscribers
· Revenue Growth Rate — It measures the month-on-month/year-on-year growth in revenue of your business and it is an indicator that shows how fast your startup is growing.
Revenue Growth Rate = ((Revenue of this month — Revenue of last month) / Revenue of last month) * 100
Some metrics related to Profit
· Net profit margin — It shows how much profit or net income you have generated as a percentage of the total revenue of your business and by understanding this KPI you will have an advantage in the pricing war against your competition and lead you to better short- and long-term decisions.
Net profit margin % = (Net Profit/Revenue) * 100
· EBITDA margin — All expenses except Interest, Depreciation, and Taxes are deducted from Revenue to arrive at EBITDA. EBITDA margin represents the rate at which revenue gets translated to cash profits. This calculation doesn’t get affected by the capital structure involved.
EBITDA margin % = (EBITDA/Revenue) *100
· Return On Equity (ROE) — ROE measures the returns that you have generated from the investment made in your business. This metric becomes crucial when you are going to raise funds for your business.
ROE % = (Profit for the period/Equity) * 100
While there are a lot of metrics available out there with which you can measure certain performances of your business — Yet, for a startup, you must select the right metrics to track so that your company will not waste any resources. It is also important to understand what the benefits of those metrics are.
Here are a few ways to identify the right metrics to track for your startup
· The metric should be related to the objectives that will help achieve business goals.
· The metric should provide reasonable information to the manager to help him formulate an actionable decision.
· The data should point to the crucial areas where it is necessary to take an action.
Once you understand how to choose the right metrics for your startup it is also important to understand and identify whether to use them for short or for long-term goals.
Here are some examples through which you can understand how to use these metrics.
For short-term goals
Churn rate — It is important to track the churn rate on a month-on-month basis to understand the customer’s response to your product or service so that you can make changes and improve it further to retain the customers.
Similarly, retention rate, cash burn, and MRR are a few examples of metrics that you should track regularly to get in line with your short-term goals.
For long-term goals
Net profit — In the short-term net profits might be low when you are in a growth phase but in long term, this metric becomes one of the most important metrics to track because our further business sustainability depends on this.
Similarly, Revenue growth, Net profit margin, and ARR are a few examples of metrics that you should track to get in line with your short-term goals.
In this way, you can analyze your business and identify which metrics are going to help you in short term and long term to use them for your benefit.
Now, let’s understand what the benefits are of using these metrics.
Business metrics will give you direct insights into the core of your business. In addition, the metrics you’ve selected will let you address different stakeholders of your startup, such as customers, vendors, managers, employees, investors, and more. Therefore, mastering and understanding business performance metrics are valuable for startup founders.
Advantages of tracking these metrics are –
· Performance tracking — It is very helpful to have a map when you are trying to reach a goal. Business metrics will serve as your map and tell you where you are in achieving your goals. For example, Retention rate metrics will tell you if customers are happy with your product or service and help to determine where you are in terms of achieving your goal of reaching maximum retention rate.
· Timely identification of problems — With the help of business metrics in your reports, you can quickly identify trends and catch problems before they cause more damage to your company. For example, if your churn rate is increasing month by month that means you are losing customers and must make improvements in product or service.
· Improve Decision-Making — While making any business decision it is important to avoid biases. You need to base your decision-making on business data that your metrics provided you. Making decisions using business data will put you in a better position to achieve your goals.
Always remember that as a startup, you still can fail even if you offer an effective product or service. A startup can only attain value if it meets its business metrics.
By using these metrics, you can measure and improve all the financial and operational aspects of your venture. And, through understanding these business performance metrics, you will make better business decisions at every stage of your startup.
At Namo Advisors, we help you with building the essential reporting frameworks and information reports. We do this using our industry-specific experiences in identifying the most relevant metrics for your business. Get in touch with us if you would like to discuss your business plans and the metrics that you should be tracking!
For more information, write to us at info@namoadvisors.com or visit our website
