What is Metric?
The startup world is filled with a lot of business jargons and one which is used most frequently is “metric”. Every now and then, we hear “metrics are not going well” or “let's find some metrics to track this”. We often interpret metrics as some formula or any function which will help us find some trends or abnormalities. The latter part is correct but I won’t agree with the former one. Metric is just a jargon used instead of measurement, it can be a measurement of productivity, success, growth etc. A business metric can be defined as quantifiable measure business track, monitor and assess the success or failure of various business processes.
Metrics are used to set some specific goals and to have some clarity and focus on what is more important for the business. Instead of just asking the team to make progress, managers or CEO can say, we need to increase this particular number by X%. Metrics are also helpful in settling arguments or debate. Properly defined metrics increase the overall productivity and helps in evaluating various product feature or campaigns.
Most important metrics any Startup should look into:
CUSTOMER ACQUISITION COST (CAC):
If your business is in early stages, this is the most important metric to track. As the term itself defines, it is the total cost of acquiring customers on a per user basis. To calculate
CAC= Total Sales and Marketing cost(including all overhead expenses)/New Customers acquired during that period
Although, CAC is not that simple as it seems. CAC calculated using above method is called “Blended CAC”, as we are also including the customers which are acquired organically. Generally, Investors like to see the “Paid CAC”, which is calculated as [Total acquisition cost/ new customers acquired through paid marketing], as it informs whether the company can scale its user acquisition budget profitably. Sometimes, it raises a debate, as even paid acquisition contributes to the organic acquisition.
A higher CAC means you are spending too much on acquiring customers, which in turn will increase your Loyal customer cost( CAC + cost required to convert a transacting customer to a loyal one).
AVERAGE REVENUE PER USER (ARPU):
It is a measure of customer’s average contribution to your revenue. It is calculated as Total revenue generated in a period divided by total customers contributing to that revenue. If you have a higher ARPU, it means you are getting more sales from your user, which in turn means you have high pricing power.
Although we can’t generalise this, as some customers might give you a lot of revenue ( loyal customers or high price customers) and some customers are just contributing a small percentage of your total revenue. To know your customers quantitatively as well as qualitatively, you can calculate ARPU as per customer segments based on the frequency of their usage.
Churn is one of the most important metrics for startups or any growing business. Churn rate is defined as the amount of customers or subscribers who stop paying for your product or service. It is also a measure of the revenue potential of your company. If your churn rate is high, you will lose customers at a higher rate and that in turn reduce your revenue growth.
Churn rate shows how really well you hold onto customers. The absolute value is important and so is the trend. Some people measure it month wise, some people quarterly, so that inactive customers, those who may start using you product/service in future, should not be confused with ones who don't intend to come back again.
In order to increase your customer base, the number of new customers should be more than your churn rate. If you have customers who are leaving your platform, you should create more retention plans and try to get their feedback so that you can reduce your churn rate in subsequent months.
LIFE TIME VALUE (LTV):
LTV is the net amount you expect to earn from a customer during the time they are with your business. It can also be defined as the net value you generate per customer after accounting for customer acquisition cost(CAC). Generally, people measure LTV as a present value of revenue of the customer. But this is not the correct way, it is the net profit of the customer over the lifetime of the relationship. One simple way to calculate LTV is
LTV=Contribution margin per customer per month * ( Average lifespan of customer in months)
Contribution margin per customer is calculated as revenue from customer minus the variable cost (selling, administrative and operational cost) associated with the customer.
For a growing business, your LTV should be a lot more than CAC (approx. LTV > 3 CAC) and one should aim to recover CAC in less than 10 months.
Burn rate can be described as the rate at which a company is consuming, or burning, its finance to support operations in excess of cash flow. Investors sees the burn rate of a company as measuring stick for its runway, the amount of time company has before it runs out of money.
Burn rate is most precious metric as running out of cash is the number one reason startup fails. It is an important metric for investors as they measure this against the future revenues of the company to decide if the company is a worthwhile investment or not.
Burn rate is calculated as a difference in the cash balance at the beginning and at the end of the month. You can also calculate quarterly difference in the cash balance and then divide that by three.
All these metrics are connected to each other and to the growth of the company. There are lot more metrics one should track to analyse each and every part its business and make informed data-driven decisions. It can be difficult for a small startup to measure all metrics, so I recommend to focus on the above metrics that majorly affects your bottom line.