A pragmatic and sound method of tracking the progress of your startup is to measure the relevant metrics of your business. This becomes especially relevant if you are strapped for cash and working on a ‘bootstrap budget’. Whereas it is common to be fixated on only revenues and profits, in the long term it is not the recommended strategy.
If you want your business to evolve and sustain in the long run, it is essential that you take a more nuanced and focused look into the company’s performance so as to tweak and finetune the areas that require attention. The key startup metrics according to Railsware that will ensure that you keep abreast of things and potential pitfalls and obstacles are as follows:
Customer Acquisition Cost (CAC) is one of the most popular and common metrics used by almost every startup. This is especially true in the case of businesses that are still in the teething stages of their growth. The reason is intuitive as every business needs customers to grow and the number of customers a business is able to acquire is determined by available finances. Whether a startup is profitable or not is then determined by the number of customers and the finances spent on the acquisition. CAC helps you put a number on this cost by dividing the company’s overhead costs, sales and marketing costs, by the number of customers acquired over a period of times.
A general rule of thumb is that if the CAC number is too high that means the cost of customer acquisition is too expensive. In order to lower this number, it is advisable that the landing and sign-up pages be optimized.
Once you have signed up customers, that does not mean that it is time to rest up. It is only half the battle. The other half is to make sure that you retain the customers who have signed up to your business. Your customers are your loyal followers, and they need your complete attention or else they might soon leave. It is important to note that generally customer retention is on average 6 to 7 times less costly than customer acquisition. According to our guide for startups, it is estimated that closing a deal with a new customer is 4 times more costly than upselling to an existing client. All of these observations make customer retention extremely important.
Losing customers is part and parcel of any business. Your product is not for everyone. What matters is to determine the level of customer attrition that you can manage. When talking about customer retention, one cannot ignore Churn, also known as customer attrition. This metric allows you to keep track of the rate at which customers have stopped paying for your product. When measuring churn, it is up to you to decide on a time frame. Some experts recommend 30 days whereas others prefer a longer period of 90 days. The reason for these conflicting timeframes is that the latter takes into account inactive customers who might not have given up your product completely. It is entirely possible to outsource your churn management for your business, and it can be a useful option if you feel this is something you may struggle with.
In order to avoid churn, try to personalize your relationship with your clients and make them feel special through customized retention plans.
Life Time Value (LTV) is the metric that allows you to calculate the amount that you stand to earn from each customer that stays with your company for a fixed amount of time. In order to calculate LTV you need to be aware of the term for which customers stay with you. It could be a year or longer, depending upon the nature of your business. Once you know the term you multiply it with the monthly revenue earned from that customer. For a profitable business, the LTV needs to be higher than the CAC otherwise your business will fail. As a general rule, the LTV needs to be 3 times higher than the CAC for a healthy business. Furthermore, you should be able to recover your CAC within 12 months if you expect your expenditure to remain manageable.
A company is akin to a living organism. It reacts to stimuli in its environment and makes decisions accordingly. Product metabolism is one such metric that measures the speed of a company to react to stimuli and make decisions. Taking the example of a living organism one step further, a startup expects it's infancy to have a high metabolism. However, as the company evolves and grows, the metabolism might slow down. Deciding a balanced product metabolism for a company is a matter of choice in which the stakeholders need to be consulted as well. Moving too fast may lead to instability just as moving too slow may lead to customer attrition.
A product going viral is the ultimate sign of success and a dream scenario for every startup. Use the viral coefficient metric to gauge the organic growth of a product. The primary use is to determine how many new clients sign up through word of mouth.
In order to calculate the viral coefficient you need to know the initial set of customers, the number of invites sent to each new customer and the percentage of invites that convert. Once the rate is repeated over several cycles, you get your viral coefficient. If the number is positive that means your customers are happy, you have achieved a sound product/market fit, you are liable to achieve high profits and finally that your cost of acquisition is low.
This is one of the most important metrics since every startup dreams of turning in profits. Revenue thus is the income that you are able to bring in. This could be through sales revenue when your customers buy your product or MRR (monthly recurring revenue from subscription products). But it could also include other sources of income such as late fees and interest. One way of ensuring a higher revenue is to turn your ‘activated’ customers into paying customers.
For a startup it can be a daunting task to keep track of all the above metrics. This is understandable as most startups in the early stages are short-staffed and over-stretched. In such scenarios, it is advisable to start small and focus on metrics that play into your bottom line. These are churn, revenue, LTV and CAC. As you grow and evolve, you can turn your attention to your businesses’ product metabolism, retention and viral coefficient.