7 Key Metrics your Startup Needs to Measure
As a startup, your focus will naturally be on rapid growth and innovation. You’ll be nurturing a fast-paced environment cycling through ideation to deployment as quickly as you can to plant your flag in your market and give yourself the best possible chance of another raise, or profitability, depending on your business plan.
But in order to do that successfully, you need ways to measure if you’re on the right track. You’ll need data on your wins and losses so that you can learn the right lessons. You’ll need a clear objective set of statistics to prove whether you’re going to survive or fail. And you’ll need supporting evidence to help you argue to investors that you’re a business to believe in.
In this article we’re going to discuss what those metrics should be. Growth Division is a marketing agency for startups, so our focus naturally tends to be on marketing metrics, but we’ll discuss higher level business metrics too.
These metrics will vary depending on the specific industry and business model of the startup, but there are some common metrics that all startups should consider tracking in order to optimise their operations and make informed decisions about the future of their business.
Metric 1: Revenue
Seems pretty obvious, but can be overlooked if you feel like your flush with investor cash.Revenue is the total amount of money that the startup generates from its products or services, and it is an important indicator of demand for the startup’s offerings. Tracking revenue allows startups to understand how much they are selling, to whom they are selling, and at what price. This information can help startups identify trends and patterns in their sales, as well as identify opportunities to increase revenue by targeting new customer segments or launching new products.
Now, many startups operate without revenue for a long time. For example, free consumer apps often launch without a clear monetisation strategy. But this situation can’t last long – in today’s climate, investors will want to start seeing proof of viability sooner rather than later.
Metric 2: Customer Acquisition Cost
Another important metric for startups to track is customer acquisition cost (CAC). We’ve written about customer acquisition cost before, but in a nutshell: CAC is the total cost of acquiring a new customer, including marketing and sales expenses. Measuring CAC helps startups understand the efficiency of their customer acquisition efforts and determine whether they are spending too much or too little to acquire new customers. A high CAC can indicate that the startup is spending too much to acquire new customers, which can eat into profits or cash runway and make it difficult to sustain the business in the long term. On the other hand, a low CAC can indicate that the startup is being efficient in its customer acquisition efforts, which can lead to increased profitability.
You can compare CAC across different segments to determine whether your audience targeting strategy is correct, and across different channels to see which marketing channels work best (although be careful with this – by focusing only on CAC to choose channels you can miss out on vital upper funnel activity).
Comparing customer acquisition cost to our next metric, LTV, is one of the core ways to measure the effectiveness of different marketing efforts.
Metric 3: Lifetime Value
In addition to CAC, startups should also track lifetime value (LTV). LTV is the total amount of revenue that a customer generates for the startup over the course of their relationship with the company. Tracking LTV helps startups understand the value of their customer base and identify opportunities to increase revenue from existing customers. For example, if a startup’s LTV is high, it may be able to invest more in customer acquisition efforts because it knows that the returns from these customers will be high over the long term. On the other hand, if a startup’s LTV is low, it may need to focus on retaining and upselling to existing customers in order to increase revenue.
We’ve written another blog about how to calculate LTV. Calculating, tracking and analysing LTV is absolutely vital. If CAC gives you half the picture when it comes to marketing efforts, LTV gives you the other half. The ratio between CAC to LTV is, fundamentally, the number that can tell you the viability of the business. It can also inform you how much you should budget for marketing.
Metric 4: Payback Period
Payback period is an interesting one, because for some businesses it’s absolutely crucial and for others it’s not much of a consideration.
Payback period refers to the time it takes for the customer to spend as much as it cost to acquire them CAC. This is important because until that’s happened, the acquisition of that customer has had a negative impact on the company’s cash reserves. The payback period can determine how much cash buffer your business needs to survive.
Some startups don’t measure this at all, because they’re in the lucky position that the average first time spend, or order value, of their customers exceeds their CAC. But for others, especially subscription businesses, this isn’t usually the case and they should expect it to take some time before they earn their investment in CAC back.
Metric 5: Churn Rate
Your churn rate is the proportion, measured as a percentage, of customers who end their subscription, or stop buying from you. A high churn rate indicates that the startup is having difficulty retaining customers, which can be a problem for long-term growth. Tracking churn rate allows startups to understand why customers are leaving and identify opportunities to improve the customer experience in order to reduce churn. For example, if a startup’s churn rate is high, it may need to invest in customer support or offer promotions in order to keep customers loyal.
Some sectors expect a high churn rate, and it’s just seen as part of the reality of that market. But in general you should aim to minimise it to increase your LTV. Furthermore, any efforts to reduce churn rate are also likely to be making your customers happier, which means they’re more likely to refer you to friends or colleagues.
Metric 6: Gross Margin
Gross margin is the percentage of revenue that remains after the cost of goods sold (COGS) has been subtracted. Tracking gross margin helps startups understand the profitability of their products or services and identify opportunities to increase profitability. For example, if a startup’s gross margin is low, it may need to focus on reducing COGS in order to increase profitability. This could involve sourcing cheaper materials, streamlining production processes, or negotiating better deals with suppliers.
Your gross margin also indicates to you what an acceptable CAC would be.
Again, gross margin isn’t relevant to all startups at all stages. For example, SaaS businesses may have had a large cost to build their product but there isn’t an incremental cost for every new customer (other than acquisition cost, servers etc). Free consumer apps may be in a similar position. But if your business involves delivering a good or service that incurs a cost for producing and delivering that good or service, measuring gross margin is vital.
Metric 7: Burn Rate
Finally, startups should also track burn rate. Burn rate measures how quickly a startup is emptying its cash reserves.
Tracking burn rate is important because it helps startups understand how long they have before they need to raise more funding or become profitable. A high burn rate can indicate that the startup is spending too much money, which can be unsustainable in the long term. On the other hand, a low burn rate could indicate that the startup has a healthy future and can make long term decisions – eg. hiring senior staff or expanding existing teams.
In recent years, startups with a high burn rate have sometimes been able to survive because the investment environment was friendly as long as the idea behind the business was exciting enough. But that’s not been the case so much over the past year or so, and startups should always be prepared to find a way to reduce burn rate and accelerate their route to profitability.
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