Even though it may seem “revenue” is the most important thing to measure, it should not be the one you pay the most attention to, there are other factors that can influence this specific metric or that have a part in your company’s growth and success. Evolution is an essential part of growing, so as your business grows, your growth metrics should evolve with it.
Keeping track of what makes your business successful and knowing how to maintain and improve those numbers is what will help you attract more investors and what eventually will help you succeed. You just need to know how to adapt and take the best out of the usual growth metrics every business measures and adapt them to your business model. That’s why today we provide you with 7 key metrics for startups:
Basically, the cost of acquiring a new customer. This is one of the most important growth metrics for an early and growing startup company since customers are the ones generating revenue. But getting customers to buy and trust in your product can be a bit expensive and you must verify if what you’re spending on getting customers is being or will be profitable soon. You’re probably going to be unprofitable for some time, but how much time can you devote to being unprofitable before you become profitable?
To calculate your CAC pick a specific time period, like a quarter, and then divide your cost of marketing and sales by the number of customers you gained during that period. For example, if your sales and marketing expenses were $100 and you gained 4 customers, your CAC is $25 per quarter.
Clearly the lower your CAC the better, but it’s perfectly normal to have a high CAC at first when you’re trying to get noticed by your target customers, the challenge here is to lower your CAC so it becomes profitable. Unless you launched a new product or service that required a whole new campaign, a CAC on the rise is a crystal sign of danger and that you won’t be able to keep the ship above water for long.
Don’t get obsessed with just acquiring new customers. It’s important to nurture the customers you already have, otherwise they’ll eventually feel abandoned and not cared for and will probably take their business elsewhere. Think about your CAC, think about how much it is costing you to acquire a new customer to later neglect them just to spend more money on getting a new customer. Doesn’t sound profitable, right?
According to Invesp, about 44% of companies maintain a greater focus on acquiring new customers vs. 18% that focus on retention. Also:
To calculate your retention rate, again you need to pick a specific time period and then subtract the amount of new customers from the total amount of customers and divide that number by the number of customers you started that time period with. For example, if you started your quarter with 100 customers, got 20 new ones but you lost 5, you finished that quarter with 115 customers; now subtract the number of new customers (20) and you got 95, divide that by the amount of customers you had at the beginning (100) and it equals 0.95, so basically your Retention Rate is 95%. The higher this number, the better!
Retained customers are not always buying customers. According to NP Digital founder Neil Patel, there are 3 kinds of customers you need to focus on:
Measuring retention won’t always give you a fair scope of those customers you’ve lost. Losing customers is something that is going to happen from time to time, no way to avoid this, but it’s important to put special emphasis on not losing more than you can handle to keep the company afloat.
Measuring churn is easier number-wise but not business-wise. To calculate it simply divide the amount of customers you lost by the amount of customers you started a time period with, the resulting percentage is your churn rate.
In order to measure churn, some startups prefer to wait a little longer so as to not confuse attrition customers with inactive ones. But losing customers is definitely not the end of the world, you are still 2 times more likely to recover a lost customer than closing a new one! But it takes a little effort. Always ask your customers what you could do to improve, people love giving their insights, especially if they might actually get some benefit from it. Just because you have active customers doesn’t mean they don’t have anything to say, don’t just ask customers when they leave you or when they slow their usage of your product; try to regularly ask all of them if there is something they’d like you to do better. You can create some surveys or have a more personal approach and call them. There is always room for improvement.
Or Customer Lifetime Value, measures the revenue you get from ongoing customers. This metric could be a little tough to measure at the beginning, but as you collect data, it will get easier to determine how much you can receive from a customer during the time they’re with your company.
For example, if an average customer stays with you for 2 years, you can calculate CLR by multiplying the monthly revenue from a specific customer by the amount of months you expect them to stay with you. It’s important to know that your CAC should be way lower than your CLR, having steady clients providing high revenue will give you a good vision of how much you can spend on acquiring new customers.
Measuring CLR can also help you improve your retention rate; if your CLR is high then you’re probably on the right track regarding your product and/or customer service, but we still encourage you to ask your customers for feedback.
This metric is focused on measuring your organic growth. When trying to launch your product, you’re probably going to share it with friends and close acquaintances, if they like it, they’re going to share it and invite others to use it as well, generating a healthy and organic word of mouth advertising.
Another way to reach a broader audience is by using social media. To calculate your Viral Coefficient you need to have your initial amount of customers (before starting sharing it), the number of invites sent to potential customers and the percentage of acquired customers through those invites. This rate over several cycles is your Viral Coefficient.
Viral Coefficient will allow you to see if your product has a positive response and therefore, if it’s eventually going to be profitable. It will also help you with managing the next metric:
They say the best advertising is word of mouth, and though that might be true and it’s also free, it’s very hard to get people to talk about your product. If you’re a startup, you surely need to have an advertising budget to move your product and take it to the right audience, expecting a fair return of it. ROA calculates such return, just divide the amount of sales that came from your advertising spending over a period of time.
If during 6 months you spent $1,000 and made $5,000 in sales, your ROA is $5, you gained $5 for every $1 you spent on advertising.
Knowing your Viral Coefficient will help you determine how much to spend on advertising when first trying it out, we recommend that you don’t go all in and to not try several channels at once, no matter how positive your Viral Coefficient is. Start low and then grow it progressively, if you start using just one channel, it’ll be easier to calculate your ROA. As you get the hang of it, you’ll be able to grow and expand.
This might be similar to your Viral Coefficient metric but it’s very important to measure your referral rate aside. Have you ever noticed when buying something online you get a small survey asking how did you find out about the product? Well, that’s the company measuring their referral rate.
But why is it important to measure aside? Well, basically because the higher your referral rate, the lower your CAC! A good way to ensure referrals is by implementing a referral program, you would get more customers and still have a low CAC. Hirebook’s Expert Program offers recurring revenue to our Experts while sharing best practices and modern methodology in Employee Engagement.
Yes, this could be the most important one since it will determine the future of your company by just measuring whether you’re making money or not. Measuring revenue is not the same for every company, it depends on the product you sell and if said product or service has additional fees or some discounts for early payment, etc.
Revenue is the most difficult to obtain, especially when starting a business, so it’s very important to keep a close eye on your sales and create strategies that’ll allow you to grow gradually and in a steady way. You can maybe ask for some payments in advance, offering a yearly discount when paying the whole year instead of requesting monthly payments is a great way to do so; strategies like these can help you maintain a steady revenue and help you strategize your growth.
There’s a lot to measure regarding a company’s growth, every company is different and everyone wants to achieve success, but you need to keep in mind that fast growth doesn’t mean you’ll achieve success and stay there for good; maybe a more gradual growth will let you see every aspect of your startup company’s progress and detect what needs change in order to achieve real success. If you’re building your Startup, we invite you to read our “Common Startup Problems and How to Avoid Them” article so you can prevent other mishaps!
Photo credit - master1305
BY Laura Iñiguez
BY Laura Iñiguez
BY Laura Iñiguez
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