Ah, business metrics… To me, it’s the best illustration of how information overload can do more harm than good. A brief online search will provide you with dozens of “key, important, essential business metrics that every company should know”.
That’s enough suggestions to suit every taste and budget, so what’s not to like, you might wonder. The caveat is that such excess of information can easily puzzle and overwhelm even experienced analysts, let alone startup owners and managers.
So I figured that, while I WILL give my 5 cents on the top 5 metrics for startups (top lists are still super-popular, right?), first of all I’d like to focus on the undeservedly ignored basics. That is, why startups need their own stand-alone metrics and how to choose the right metrics for your startup. And after that, yeah… It’s metrics galore, everyone :D
Why Startups Need Unique Metrics
To answer this question, we have to consider what differentiates a startup from a full-fledged business. For the sake of our discussion, it’s these two things:
- Startups must react faster.
Without a large financial buffer that bigger companies have, a startup has to rely upon its flexible nature to survive, reviewing its strategy and current status as often as monthly, weekly, or even daily in some cases. Metrics for startups should reflect that by providing the relevant information as fast as possible. - Startups have a bigger room for experimentation and mistakes.
With less to lose and simpler structure, it’s easier for a startup to try something new, test different approaches, implement innovations. Thus, it should employ metrics that are granular enough to show the influence of said innovations, yet not so detailed as to get bogged down in the minutiae.
4 Simple Steps to Choosing the Right Metrics for a Startup
Clearly, many startups, many metrics. How do you choose the right ones for your business? Well, that’s where you stay awhile and ponder on what your startup is trying to achieve. Metrics, after all, are only used to evaluate your progress in moving towards your goals, so the goals are what you have to consider at this stage.
- First of all, determine your overarching Objective. It’s the grand goal, the state which you want your startup to reach in the future.
- Then, analyze the current state of your startup, e.g. using SWOT analysis.
- Now that you see the gap that separates your “now” from your “ideal”, it should give you some ideas on how to bridge it. Define the “bridging activities” in the form of tasks for your team.
- Finally, it’s metrics time! They should stem right from the tasks you’ve just set, and with the Objective in mind. This means that you should never apply startup metrics if you don’t see how they evaluate your activities and proximity to a concrete target.
It’s most convenient to go through these steps in dedicated planning and management apps. They provide lots of features to help visualize your project in a clear manner (such as Mind map, Roamdap, Kanban board, Sprints, etc.) and overall streamline the process.
As a side note, before we move on, you might want to read about the concept of OKR - Objectives and Key Results. It offers an interesting point of view on business metrics and their relationship with business goals.
Top 5 Startup Metrics
And now, let’s list a bunch of startup metrics and see when you want to use them (and sometimes - when to avoid them).
1. Customer Acquisition Cost
The cost of acquiring a new customer is a pivotal metric for any business, from startup to multi-billion corporations. To calculate CAC, divide your cost of sales and marketing by the number of customers you gained over a specific period.
The lower your customer acquisition cost the better. But how low is low enough for a startup? It depends on your industry. Also, keep in mind that it’s not uncommon for startups to operate at higher-than-average CAC at the beginning, just to get the initial traction and momentum. Generally, introducing a new service or product will always cause CAC to rise.
2. Retention Rate
A metric that works great in conjunction with CAC is retention rate, a.k.a. its counterpart, the churn rate. It measures the ratio of customers that stay with you to those that leave. It's key for subscription-based businesses, but is also important for any startup, since their top initial priority is to grow the user base, not the immediate revenue. And, obviously, they want to keep the retention rate high / churn rate low.
One of the crucial factors that can affect your retention rate is customer satisfaction. And there’s no better way to check if your clients are happy with the service than a client survey. I have a whole piece here on Hackernoon about my experience with different survey tools, do check it out if you want to learn more about those.
3. Customer Lifetime Revenue
CLR evaluates a business’ revenue from standing customers. This is one of the metrics that, while quite helpful, is definitely not for every startup, as it requires a reasonable amount of data before you can measure CLR. So if you have access to such information, customer lifetime revenue can prove quite useful, but more often than not startups will not care about it.
4. Return on Investment
The ROI metric actually comes in all shapes and sizes: it can count a company’s return on specific activities such as marketing, or it can be based on total investment. For startups, advertising spending is actually a serious investment, so you want to keep a close look at its ROI to ensure it generates a return.
5. Gross Profit
It doesn’t matter if you’re a startup owner striving to see it blossom, or a CEO of a large business with investors to please - the bottom line is everything. There are many ways to calculate gross profit, but in general you want to deduct all operating expenses and costs of goods sold and your operating expenses from your net income.
Once again, you want to keep your GP as high as possible, but keep in mind that for a startup it’s okay to shoot for customer retention rather than the gross profit at the earlier life stages.