Source: Neil Patel
Revenue is the most important metric when it comes to starting a business. But it’s not the only metric you should be concerned with.
Of course some companies have gotten very creative when it comes to justifying their business model to investors, but I don’t think those are the kinds of metrics you should be paying attention to, especially if you want to succeed.
In the end, it’s watching and learning from the traditional metrics that will help you grow your startup into a real business. Here are the 9 most important.
Startup Metric #1 Customer Acquisition Cost (CAC)
CAC is the metric that matters the most if you are in the early stages of your startup growth because if you want to survive you need users. But it costs money to acquire customers. The question is how much, and is it profitable?
To calculate your CAC cost, divide your sales and marketing costs, including overhead expenses in these departments, for a given period by the number of customers you picked up during that period.
A high CAC cost means you are spending too much money to acquire new customers. To lower it you need to optimize your sign up and landing pages. Optimizely is a great tool to use when testing different variables on a web page.
We’ll talk more about what’s a viable CAC cost for a startup when we get to the Life Time Value metric.
Startup Metric #2 Retention
I’ve seen a lot of entrepreneurs get so obsessed with customer acquisition that they forget about customer retention. I’ve actually been guilty of it myself!
Unfortunately you need to break out of this obsession because if all you do is focus on acquisition you end up neglecting your current customers, which can mean they might eventually get frustrated and leave.
One of the most important things that I learned about retention actually helped me break my single-minded focus on acquisition, and will probably help you too. For me, it costs 6 to 7 times more to acquire a new customer than it does to keep a current client.
In addition, it costs me 4 times more to close a deal with new customers than it does to upsell a current one. That means you cannot neglect your current clients!
So who exactly should you focus on? There are three kinds of customers you need to think about:
- Current – what can you do to make these customers more satisfied? If you don’t know, simply ask. People love to talk and give their opinion, so you won’t be bothering them.
- Inactive – customers who’ve stopped using the product or slowed their use of it should be asked why. Again, they are a great source you should take advantage of to help you improve your product and customer service.
…We’ll talk about the third customer in the following section.
Startup Metric #3 Churn
Churn, or attrition, is another really important metric you should keep your eye on. This is a measure of how many customers stop paying you for your product.
Some startups measure churn at 30 days. Others wait 90 days so as not to confuse an inactive customer, who may start using the product again in the future, with someone who doesn’t intend to come back.
It’s important to realize that you will lose customers. There is no getting around that. What you have to do is find out what a profitable level of loss is to you.
By the way, did you know that you are 2 times more likely to close with a lost customer than you are to acquire a new one? That should be a good incentive to motivate you to find out why certain customers have stopped paying for your product.
If you have customers who are leaving your product, then try to conduct as many win/lose interviews with them. You can do this by phone or email, though I recommend you do as many as you can on the phone. Make them feel like a real person.
Another great way to keep churn low is to use data to anticipate churn and then create personalized retention plans.
Startup Metric #4 Life Time Value (LTV)
What exactly is the LTV? It’s how much you expect to earn from a customer during the time they are with your company.
That means you first have to know how long most customers stay with you. It could be six months, 12 months or longer. Then you multiply the monthly revenue you expect from that customer and you get the LTV.
Keep in mind that you should include any expenses related to installation or maintenance of your product.
You don’t need a college education to see that a business will fail if the CAC is higher than your LTV. This is why David Skok calls CAC the startup killer.
Here are two guidelines David suggests you might find useful:
- LTV > CAC. (It appears that LTV should be about 3 x CAC for a viable SaaS or other form of recurring revenue model.)
- Aim to recover your CAC in < 12 months, otherwise your business will require too much capital to grow.
Obviously what you need is a CAC a lot lower than LTV.
Startup Metric #5 Product Metabolism
Product metabolism is a metric created by Dustin Dolginow, and it basically measures the speed at which you and your company move and make decisions.
Like the human metabolism, product metabolism is usually high in the early stages of a startup. As the company begins to mature, however, that metabolism begins to slow down.
Dustin argues that this is good since it could be damaging for a large company to make lots of gut-level decisions that may hurt customer retention, and because of the larger size of the company, they cannot respond quickly.
Netflix is a company that’s recently made some rather dramatic changes to how it operates, namely raising prices and branching off one of its divisions into a full-fledge company. Not everyone agrees that this was a bad decision, but it’s still early so time will tell.
Like a lot of these metrics, maintaining product metabolism is a balancing act. If you move too fast you create instability. If you move too slow you might irritate your customers.
One of the best ways I’ve found to measure product metabolism is to use KISSinsights and ask my customers two simple questions: Are we moving too fast or too slow? Why?
Startup Metric #6 Viral Coefficient
This metric measures the organic growth of your company. Usually a startup will start with inviting friends to use the product. If it is a good product, then these beta users will then tell their friends and so on.
Other ways that make your product viral is through social pushes like share buttons, email invitations and promotions on Twitter or Facebook.
Here are your inputs when calculating the viral coefficient:
- Initial set of customers
- Number of invites sent to each new customer
- Percentage of invites that convert
That conversion rate over several cycles is your viral coefficient. A positive viral coefficient rate means four things:
- You are giving your customers a positive user experience
- You’ve found a good product/market fit
- You have a low cost of acquisition
- You will probably have high profitability
One way to improve your viral coefficient is to build incentives into your products.
The business app Hashable is a good example of this. As people use the app they are pushed up the leader board in rankings, and as they move up they are encouraged to share their progress with their network, leading to more users.
Startup Metric #7 Revenue
This is one of the most important metrics to pay attention to because it’s all about profitability. In other words, are you making money?
Revenue is the income that your company brings in. It’s usually reported as “sales” or “sales revenue” that comes when customers purchase your product, but revenue can also include other income like interest or late fees.
Revenue doesn’t come easily, and you’ll be paying out a lot more money than what is coming in if you are a SaaS since customers usually pay in small increments.
One way to avoid this is by offering longer contracts and requiring advanced payments.
If you have a good product, you should have a high conversion of users who are not paying that eventually become paying customers. To increase revenue, focus your efforts on turning “activated” users into paying customers, the focus of our next metric.
Startup Metric #8 Activation
Activation is a measurement of the conversion rate from when a visitor or prospect moves to becoming an active user, the signal being some kind of sign up or download.
A high conversion rate means that the visitors had a good first user experience. A low activation rate usually means that your product isn’t interesting enough or they found it difficult to get started.
SaaS products usually use activation as a way to attract and gain a following in the early stages of their business, hoping that the good user experience will entice people to pay for additional benefits.
This is true with the web-browser productivity tool ToDoist.
Activation begins with entering a username and password. The free plan allows people to build a list of projects they can track, including all the sub-tasks. But you have to become a premium member if you want more robust tools like alerts and notes.
Startup Metric #9 Referral
This metric is sort of a spin-off of your viral coefficient metric, but it’s truly too important not to measure as a standalone.
To calculate your referral rate just figure out the percentage of users who come from existing customers.
A good way to determine a referral that’s viral versus a recommendation from an existing customer is simply to ask when a user is signing up, “How did you hear about us?”
As you might expect, the higher your referral rate, the lower your CAC is going to be and the more profitable your company will be.
A great way to encourage referrals is to program occasional reminders into your products. You’ll see this often with phone apps that show pop ups from time to time asking you to send a recommendation to a friend.
Isn’t it amazing how all of these metrics are connected? But it can be difficult to measure and monitor all of these metrics as a small startup. You just don’t have the time.
I recommend you start small and focus only on the ones that affect your bottom line, namely revenue, CAC, LTV and churn. After that, pay attention to retention, referral, your viral coefficient, activation and product metabolism.
This is why I’m became the Co-founder of KISSmetrics. I felt the time was right to make an analytics package that helps track these important metrics for startups.
I want to hear from you: What other metrics should startups focus on?
About the Author: Neil Patel is the VP of Marketing of KISSmetrics and blogs at Quick Sprout.
About Scale Finance
Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices in Charlotte, NC, the Triangle, the Triad, Southern Pines, and Wilmington with a team of more than 30 professionals serving more than 100 companies throughout the region.