Key Business Metrics You Should Know As a Startup Founder
There are many business KPIs that can be used to track the success of your marketing, product, and sales initiatives. But there are core business metrics that offer a bird’s eye view of your company’s progress toward exponential growth.
In order to secure investment, allocate budget correctly, and achieve your long-term growth ambitions, you must keep a close eye on these key metrics.
As a startup founder, it’s critical that you have a deep understanding of your business metrics and key performance indicators. Without the necessary knowledge of your metrics, it will be hard to know what to focus on, when making decisions or where to allocate resources.
We set up different tools that help us to measure and visualize those metrics. Let’s dive into this and pass through each of them one by one.
Generally, we can divide business metrics into the following categories.
- product,
- finance,
- marketing,
- and sales.
The North Star Metric
The term ‘North Star Metric’ was first introduced by startup investor Sean Ellis. The aim of North Star Metric is to get everyone in a company focused on one goal. Silicon Valley leaders use the North Star Metric to prioritize projects and efficiently assign resources. For example, the North Star Metric at Meta is ‘monthly active users”. When choosing your North Star Metric, it’s important to look at the big picture. For example, let’s take a SaaS business that generates revenue through a monthly subscription model. The founders of this business might choose ‘monthly sign ups’ as their North Star.
But you should be very careful with it. If you have wrongly defined it, you are risking going in the completely wrong direction and spending all the gas you have.
Customer Acquisition Cost
Customer acquisition cost(CAC) is a measurement of how much money it takes for your business to win a new customer. CAC is an important metric in business performance management, as it indicates whether your sales and marketing strategy is working efficiently.
Tracking customer acquisition costs accurately is a difficult business, especially if you have a blend of marketing channels and different resources. But knowing how much you spend to bring in the customer to your platform is essential for your business.
The formula is:
CAC = (marketing + sales expenses)/ number of new users acquired
Many times I saw teams misinterpret marketing and sales expenses when they calculate CAC and only include them in their advertising or promotion expenses. In such scenarios, it's great to bring the analogy with the Cost of Good Sold, which is a term applicable to physical products. The cost of goods sold (COGS) includes all the costs and expenses directly related to the production of goods. Said so, when we talk about marketing and sales expenses, we refer to any direct costs that are applicable for bringing customers, thus they include also marketing and salesperson wages as well.
Churn Rate
The churn rate or attrition rate is the rate at which your customers stop using your product over a given period of time. Churn can also be applied to the number of subscribers who cancel, don’t renew a subscription, or downgrade their subscription.
The higher your churn rate, the more customers you are losing.
The lower your churn rate, the more customers you retain.
There are 2 types of important churn rates to consider: customer, and revenue churn rates.
Customer Lifetime Period
The customer lifetime period is the total period of time that customers pay for your product. To calculate that, let’s go into this example.
If you have a 60% loyalty rate, then your churn rate of customers is 40% (Note: These two rates always add up to 100%.)
So the customer lifetime value period can be calculated as 1 /40% = 2.5 years.
Customer Lifetime Value
The next important thing is the Customer lifetime value(CLTV) or just lifetime value (LTV). LTV is a performance metric that measures the revenue your customers bring in throughout their relationship with your business or usage of your product.
LTV is an important metric to determine whether your customer acquisition cost (CAC) is justified, and helps you to decide your pricing strategy.
The formula is:
LTV = (Annual customer revenue) x (Customer lifetime period).
Let’s say we have a SaaS business, where we charge customers $10 monthly, and we have a 40% yearly customer churn rate. As per the last example, the Customer's lifetime period will be equal to 2.5 years. Also based on $10 monthly recurring revenue (MRR), we can calculate Annual recurring revenue (ARR), which will be $120. So now let’s get into LTV.
LTV = 120 * 2.5 = $300
Please note that it costs more money to acquire new customers than it does to keep existing ones, so increasing LTV is an obvious lever to pull to maximize the profitability of your business.
LTV also offers a good insight into your customer satisfaction. If your customers continue to use your products over an extended period of time, it means you’re doing something right.
Also, it’s worth mentioning, the LTV/CAC ratio, which is an important indicator that shows the viability of your business. And generally speaking, a ratio greater than or equal to 3.0 is considered “good”.
Retention Rate
Every company, whether its product or channel is physical or web/mobile, can summarize its mission in three things:
- build great products,
- get, keep, and grow customers
- and make money directly or indirectly from these customers.
Getting customers is one of the key activities you need to do, but don’t get obsessed with just acquiring new customers. It’s important to encourage the customers you already have, otherwise they’ll eventually feel abandoned and not cared for, and will probably leave.
So there is why it’s very important to keep customers or retain them. You need to give customers reasons to stick with your product.
To calculate your retention rate, again you need to pick a specific time period and then subtract the number of new customers from the total amount of customers and divide that number by the number of customers you started that time period with.
Final notes
Business metrics are a pretty extensive topic, so I decided to divide the exploration of them into several parts, for you to keep the focus and get the most out of this article.
