It’s true! Nobody sits down with new startup founders and teaches them how to measure success, which metrics to track, and what to optimize. These things are left to be learned by experience. Which, we agree, is a great way to learn but it doesn’t mean that you burn your hand.
So, we are putting out the key metrics you should track in your startup from day one.
It is no secret that it highly important for every startup to keep measuring its performance as and when it grows. Your startup might be recording a high number of sales and you might feel that it’s working really well and is on its way to becoming big.
However, if you look closely and start analyzing the numbers, you might find out that in boosting the sales, you ended up boosting the cost even more, or ended up burning cash, etc.
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Unless you measure your startup metrics regularly, you wouldn’t know for real, how much has your startup grown. They also help you identify the challenges that your startup might be facing, and guide you in fixing them.
With these startup metrics, you can strike a balance amongst all the activities of your business, and the various departments of your startup.
Let’s have a look at 7 startup success metrics to track that can make a difference:
#1 Customer Acquisition Cost (CAC)
Customer Acquisition Cost or CAC is the average amount of money you need to spend on marketing, sales, and related expenses, to acquire a new customer.
CAC can be calculated by dividing the total cost of marketing and sale by the number of customers you achieved over a particular period. Ideally, the lower the CAC, the better.
However, since there are a lot of factors involved, how low could also depend on your industry. For instance, a CAC of $100 in a meal kits business could be fine, whereas the CAC in the business of iPhone charger cables should be way lesser than that.
A high CAC could be worrisome for your startup, however, it could also be because of other factors like the introduction of a new product or service with high margins.
For best results, CAC should be combined and measured along with startup metrics, to understand the exact impact. CAC is one of the most important startup success metrics to track because your business thrives on your customers.
If you don’t have customers to sell to, you don’t have a business. And it’s important for you to estimate the cost at which you are acquiring these customers in the first place.
#2 Burn Rate
Every business survives on the cash it has and hence, one of the most important startup success metrics to track is the burn rate.
Burn rate measures the amount of cash that goes out of your company every month. In other words, it’s a way to measure the cash flow of a company, by analyzing the monthly revenue and expenses, both fixed and variable.
Say, the company starts a month with $50,000 cash, and by the end of the month it has $40,000, it’s burn rate is $10,000. Now, to survive your business must be able to cover that up with revenue and you must also try to reduce that number.
If your company’s net cash flow is positive, it means that your company isn’t burning any cash, which is a good thing.
#3 Retention Rate
Retention rate measures the percentage of paying customers who continue to remain as paying customers during a given period.
You might be great at acquiring new customers, but your business isn’t going to solely grow on it if you aren’t able to retain your existing customers.
In fact, a new customer might do business with you once, but your retained customers will be buying from you for a long time. Hence it’s one of the most important startup metrics.
The opposite of it is the churn rate, which measures the percentage of customers you lost in a given period. They represent two sides of the same coin, and both aim at highlighting the same thing.
It doesn’t matter which one you measure, just make sure your churn rate is as low as possible or your retention rate is as high as possible.
If the numbers show that you’re losing your existing customers more than you should, you need to take steps in retaining them by boosting their trust and loyalty for your brand.
#4 Life Time Value (LTV)
Lifetime value (LTV) is the measurement of the net value of the customer to your business over the life of the relationship with your company.
In simple words, it is how much you expect to earn from a customer during the period that they are with your company.
First, you need to identify how long the average customer stays with you, which could be half a year, a year, or even longer.
Then multiply it to the monthly revenue you expect from them, and that’s how you get the LTV. Any expenses related to the installation or maintenance of your product should also be included.
As we mentioned earlier, CAC can be compared and used along with other startup metrics for deeper results.
Now, if your LTV is high, you can afford to have a high CAC as well, because you can afford to spend more to acquire that customer. But, if your LTV is low, your CAC would also below.
Also, your LTV should be at least around 3 times your CAC for the best results usually.
#5 Revenue Run Rate
When your business is up and running, another one of the startup success metrics to track is the revenue run rate.
It helps in determining how your business is scaling by measuring how your sales develop over a particular period.
You can use the revenue rate to see how likely you are to match your forecasts, predicted trends, and also avoid problems by making changes to your pricing.
It can be used for budgeting, extrapolation of revenue and profit, and is also useful when a business witnesses change in fundamental operations.
#6 Return on Advertising Spending (ROAS)
Advertising has been one of the best methods of building brand value and attracting customers for the longest time.
However, what if you are spending way too much on your advertisement than the return it generates for you? That’s going to have a negative impact on your business.
One of the startup metrics, Return on Advertising Spending, or ROAS helps you in evaluating that.
For instance, if you spent $10,000 on advertising which resulted in sales worth $20,000, your ROAS would be $2. In other words, you generated a revenue of $2 for every $1 you spent.
We left this for the last because, in the end, margins are startup metrics that decide the ultimate position of a business.
There are different types of margins that can be measured. Gross margins tell you if your management, sales, and customer teams are effective enough to drive business.
The operating margin evaluates the profitability by measuring how much of a single dollar of revenue is left after considering both the cost of goods sold and operating expenses.
The profit margin is the mark-up amount of the selling price expressed as a percentage. It can help in considering the return on investment on the product’s cost and understanding the sustainability and scalability of a company.
There are a lot of startup success metrics to track that can help you grow your business. To start with you can use the key performance indicators (KPIs) we’ve mentioned in this guide, but with the time you might also be able to add more startup metrics to your list.
The more clarity you have about your business’ numbers, the better you can identify the problematic areas and take necessary action to take care of them.