In the process of evaluating the scalability of early-stage startups, several founders, investors, and business enthusiasts often tend to get it all wrong. Startups live and breathe digital but fail to understand market dynamics, investors understand the market but fail to step out of safety nets and business enthusiasts who seem to bridge the gap, often tend to slack off in true adoption. The mistakes that are unique to each entity of the ecosystem often have detrimental impact on their success rates and longevity. These can all be attributed to the wrong or inadequate attention to metrics. Failure to track the metrics that really matter for your startup creates larger problems in the long run.
As a business owner, two terms you are very familiar with; gross income and database of users. Sometimes, these metrics are unwittingly deceiving. They distract you from the real work required and can be the real reason your business is not making progress.
To this end, we initiated correspondence with a plethora of veteran professionals and investors, seeking their thoughts on the metrics which really matter for burgeoning startups. The insight gleaned was unanimous and we were able to come up with some of the metrics discussed below.
Measuring the monthly increase in revenue is probably the most effective way to monitor your growth as a business. This is a solid index of where your business is headed. Several industry veterans including the co-founder of Y Combinator and partners at Frontline ventures headlined this as the principal number to critically assess. What’s of more consequence however during the growth phase of the startup is that fun word called ARPU which expands to Average Revenue per User which is the measure of a customer’s average contribution to revenue measure of a customer’s average contribution to revenue
If you have one million users signed up on your platform, meanwhile, less than 5% actively utilize your service daily, there’s a problem. The problem becomes even more apparent when you expand your capacity to serve the people in your database without considering the active number of users.
The number of clicks, time spent on your page, the number of pages viewed, downloads, and active subscriptions should give a clear idea of this. According to George Northcott, this metric is what tells you if your customers barely open the product or if they do use it.
The number of Active users metric is further granulated as Daily Active Users (DAU) and Monthly Active Users (MAU) and a running comparison between the two gives a measure of what is called the Churn Rate.
There are periods of buoyancy and other times when business just appears bad. It is important to note these periods and seek reasons for the unusual activity. It might be those who cancel their subscription with you or those who fail to make a repeat order. Either way, the customer retention rate or customer churn out rate is a core metric to track.
Investopedia defines churn rate, also known as the rate of attrition, as the percentage of subscribers to a service who discontinue their subscriptions to that service within a given time period. For a company to expand its clientele, its growth rate, as measured by the number of new customers, must exceed its churn rate.
While it is mighty difficult and bordering on impossible to come across a zero churn rate, it is always a good practice to keep track of this metric on a regular basis to analyze the reasons for people leaving your site or dropping off your app, which in turn can provide the insights for drawing up better acquisition and retention strategies.
Apart from the income accrued monthly, it is equally important to know the rate at which expenses are being incurred. The rate at which cash is decreasing is captured in a metric called Burn Rate. This is an essential metric which determines how long your business can survive. By tracking this rate, you will also be able to take pro-active decisions, completing fundraisers before the need arises. Choosing to ignore or assume this metric would signals disaster for a startup.
Startups in their early stages especially would find it important to understand and monitor burn rate as companies fail when they are running out of cash and don’t have enough time left to raise funds or reduce expenses. This metric is of prime importance especially in a startup’s progress towards Series A investment and even after.
Customer Acquisition Cost (CAC) – That companies spend a pretty penny on acquiring customers is stating the very obvious. Companies employ a wide variety of methods to acquire a customer, ranging from direct response advertising to subtler branding strategies. Tracking the total spend against the number of customers acquired is the basis for calculation of Customer Acquisition Cost (CAC). The CAC metric is of equal importance to both companies and investors since it effectively is the perfect measure for ROI calculations. At every stage, startups work tirelessly towards bringing down their costs of acquiring customers by continuously building their goodwill, loyalty and stickiness quotient.
Customer Lifetime Value (CLV) – And finally the metric that’s considered most vital across the spectrum - Customer lifetime value. Also known as CLV or LCV or LTV, Customer Lifetime Value can be typically defined as the value (in current dollars) of the net profit you can expect from a given customer’s purchases over the entire life of the customer relationship. CLV effectively is the value a customer contributes to your business over their entire lifetime at your company.
To put CLV in perspective, we need to evaluate it in relation to Customer Acquisition Cost which we just covered in the previous block. Assuming you your cost to acquire a customer is $15k and the retention cost is $5k and your CLV is $50k. So using these values, we conclude that beyond 3 years you'll only be starting to lose money with this customer. CLV not just helps a company improve on their overall profitability and effective ROI, but only provides priceless insights on the right customer strategies to focus on.
These metrics are just the tip of the proverbial iceberg. Each investor may carry reams of paper containing many more than what can be put together in a blog. And it must be said every one of these metrics are great on paper, if they are used right. But really, there is not much of a point in tracking these metrics if you eventually fail to address the results. Also, it is understood that the process of monitoring these measurements might prove daunting, especially for a startup with limited access to funds and manpower. Luckily, there are tools to help you visualize this data in real-time.
One takeaway from our experience at Biztruss in interacting with startups has been the diligence in adopting digital metrics. On the flip side, due to a lack of experience, these may tend to be approached theoretically by these startups before gaining market exposure or a few lessons from the school of hard knocks. Learning is an iterative process, but it’s never so relevant for any entity as much as it is for a startup. But with a digital way of life that’s much beyond the digital adoption that regular organizations grapple with, they are much more equipped to stride into the digital age.
So power your digital ride with the right metrics. Especially for your startups, it’s just what you need. Till we roll out more on this exhaustive subject of metrics, perhaps a part 2, stay in the pink of digital health.
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