Key Metrics For Startups Explained

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Key Metrics For Startups Explained

The purpose of the growth metrics is to measure the historic growth of a company. Additionally, growth metrics provide meaningful insights into the future. To sustain the business growth and scale the business further, it’s necessary to analyze the key metrics for startups to drive growth.

The Importance Of Key Metrics For Startups

So why do you need to focus on key metrics for startups? Because it is difficult to improve on something that we don’t measure. Even though the company’s revenue gives an idea of the growth, it’s too broad to measure success accurately. Key metrics for startups, on the other hand, are data-driven and provide accurate knowledge of growth that is measurable. These are crucial data that help the business to succeed.

Types Of Key Metrics For Startups To Measure Success

1. Revenue

revenue

Revenue, in simple terms, refers to the amount of profit you gain over a particular period. It is the total amount of cash obtained resulting from selling products or services over a given period. Of course, this period can vary according to your preferences. Nevertheless, revenue is by far the most critical growth metric for any startup. It determines whether your startup is profitable and has a future, or it is running at a loss and has an inevitable end in sight.

Creating well-thought-out strategies by keeping in mind the different factors is essential for gaining revenue. Processes that produce steady and gradual growth instead of fast growth ensure better stability and assurance of staying profitable over time. You need to constantly calculate your revenue to have a good idea of what works and what doesn’t, whether it’s products and services or advertising and marketing campaigns.

2. Revenue Growth Rate

The revenue growth rate is one of the key financial metrics for startups. It indicates the growth of revenue on a monthly or yearly basis. It can provide you with insight regarding the growth rate of your startup and the growing demand for its products. In addition, the revenue growth rate helps track the progress of the sale of your products or services.

Calculating The Revenue Growth Rate

To calculate the revenue growth rate of your startup, you need to follow the given formula:

[[Revenue this month – Revenue last month] / Revenue last month]] X 100 = Revenue Growth Rate (in %)

You can also compare the year-over-year (YOY) revenue growth rate. This gives you a long-term view of your startup’s growth trajectory.

3. Active Users

Active users are the number of users engaged in activities that involve interaction with the products, website, or application. Thus, ‘active users’ is a significant growth metric for startups. It helps track the number of people engaging with your content. This is a core growth metric for startups. It gives you a general idea about the efficiency of your products and marketing work.

Based on different timeframes, you can divide into active users two types. Daily Active Users (DAU) and Monthly Active Users (MAU). However, active users should not just be the total number of people who engage with your content. It should specifically define whether the users are new or existing ones. Many users sign up only to never return. So, counting just the total number of users engaging with your content is not enough. You need to be specific with who counts as active users.

Calculating Active Users

To calculate the number of active users, first, you need to define what an “active user” is for your product. After this, you can calculate the Daily Active Users (DAU) by adding up the number of unique active users in a single day. You can also calculate Monthly Active Users (MAU) similarly as DAU, but you have to use a different timeframe. To find the MAU of your content, you can add the number of unique active users during a single month.

Here’s an example of how Facebook defines its MAU:

“A monthly active user (MAU) is a registered Facebook user who has logged in and visited Facebook through our website or a mobile device, or used our Messenger app during the last 30 days from the date of measurement.”

4. Burn Rate

‘Burn rate’ refers to the degree to which your startup is spending money or the rate of negative cash flow. Knowing your startup’s burn rate gives you an idea of whether you have to minimize the expense or invest in areas such as marketing, development, or hiring. The burn rate metric is essential as it provides you with an idea of the rate at which your startup spends money.

In addition, any irregularities in the burn rate can point to unexpected expenses. Observing your startup’s burn rate is essential. It reveals how much cash you need to pump into operating the startup. This can help you determine how long a startup has left before completely depleting its cash reserves. In short, calculating your burn rate gives you an idea of your cash runway as well.

Calculating The Burn Rate

You can calculate the burn rate of your startup in two different ways: Gross Burn Rate and Net Burn Rate. Both burn rates are usually calculated monthly, but this can vary depending on how frequently your startup spends money.

  • Gross Burn Rate (GBR) –The total amount of cash that your startup burns over some time is called the gross burn rate. It is a calculation of your startup’s expenses.
  • Net Burn Rate – The Net Burn Rate is the amount of cash that your startup burns compared to the cash generated over the same period.

5. The Cash Runway

Cash runway is one of the key metrics for startups. It further takes burn rate to the next level. While burn rate gives you an idea of your startup’s expenses, cash runway tells you how long your company’s cash reserves will last. This helps you see whether you need to bring in other ways of funding your startup or improve on the current efforts. Knowing your cash runway also lets you see where your startup company is headed financially, and you can cut expenses in areas wherever necessary.

Calculating cash runway gives you a particular result, but this result is not definite and can change over time. For example, cash runway results can vary whenever there is a change in your startup company’s cash reserves or also when there is a change in burn rate. To get the most accurate and reliable estimations of cash runway, you should come up with a model of your expected expenditures and revenue.

Calculating The Cash Runway

To calculate cash runway, you need to divide the current cash balance by the monthly burn rate.

i.e., Cash Balance/Monthly burn rate = Cash Runway.

6. Customer Acquisition Cost (CAC)

Customer acquisition cost (CAC) is one of the key financial metrics for startups. It measures a startup’s cost of acquiring new customers. CAC includes all of your marketing and sales expenses and the salaries and payments for teams directly involved in bringing in new customers. Your CAC results can help you identify if your marketing and sales expenditures are too high or if your current efforts are worth further investment.

CAC is a critical growth metric for any startup company, especially in the early stages, where expenses can be pretty high. Of course, lower CAC results are better, but it is normal for any startup to have a high CAC during the early stages. During these stages, the challenge for a startup company is to lower the CAC in as little time as possible. However, suppose your startup is well on its way to gaining revenue over its initial costs. In that case, a high CAC is acceptable only when launching new products or services requiring rigorous campaigns.

Another essential thing to keep in mind about CAC is to distinguish between paid CAC and blended CAC. While paid CAC considers only the new customers obtained only from paid marketing campaigns, blended CAC accounts for all the new customers acquired in total, including those acquired spontaneously. As a result, paid CAC is more efficient in calculating the growth metric of a company.

Calculating Customer Acquisition Costs (CAC)

You can calculate the CAC of your startup by taking into account all of your total sales and marketing expenses over a period of time. Next, divide that number by the number of new customers acquired during the same period. You can check the efficiency of different marketing channels by using the cost of each channel and customers gained from that channel itself instead of taking them in total.

7. Customer Lifetime Revenue (CLR)

Customer Lifetime Revenue is a measurement of the revenue you get from a customer over time that the customer becomes an active customer. Thus, customer Lifetime Revenue might be a difficult metric to measure at the early stages of your startup company. However, it gets easier to determine the revenue you can receive from a customer over time.

Measuring your CLR is very important for any startup, especially as a metric for comparison with your CAC. Your CAC should always be lower than your CLR. Or you will be running at a loss while acquiring new customers. Conversely, if your CAC is higher than your CLR and doesn’t show any signs of reducing significantly over the next few months, then you should consider rethinking your CAC strategies.

Customer Lifetime Revenue (CLR) calculation

To calculate the CLR of your startup company, you can take an average of the monthly revenue of all customer. Next, multiply it with the number of months that a customer usually stays with your startup or the number of months that you expect them to stay with your startup.

8. Churn Rate (Customer/User)

This is one of the key metrics for startups. Customer churn is the percentage of customers who discontinue using the company’s services over a given period. For subscription model companies and B2B companies, this metric is important as the focus is on the volume of customers. However, B2B companies must retain their customers since they are less in number and are high-value contracts.

Moreover, customer satisfaction can be measured with the churn rate metric as users stop the service when they are dissatisfied. As such, this metric is helpful in terms of identifying their reasons for discontinuation. The startups can measure why they are losing customers. And, then take the necessary measures to improve the customer retention rate. They can tailor products or services to fit the needs or desires of customers in a better way.

Calculating The Customer Churn Rate

Customer churn rates can be calculated for varying periods, such as monthly, quarterly, or yearly. It denotes the percentage of change in the number of customers over the period when compared to the beginning of that period.

The formula to be used: (number of customers at the beginning of the month – number of customers at the end of the month)/ no. of customers at the beginning of the month

9. Churn Rate (Revenue)

Churn rate is one of the key business metrics for startups. It’s the rate at which the startup loses revenue as the customers decrease or result from downgrades in the subscriptions or cancellations. It is necessary to note that the revenue churn rate and customer churn rate can vary. The higher your churn rate is, the lesser the chances of having stability or increasing profits from your startup.

Having a negative churn rate by bringing in more revenue will undoubtedly help your startup progress financially.

A good way of using the revenue churn rate metric is by comparing it with the customer churn rate. This tells you if you are mainly losing smaller or starter customer accounts or your churns from losing larger, longer-term customer accounts. Losing larger, longer-term customer accounts may well indicate serious problems with existing strategies for customer retention. On the other hand, losing smaller or starter customer accounts can mean issues related to how products and services fit newly acquired customers.

Calculating the Revenue Churn Rate

While calculating the revenue churn rate, it is essential to distinguish between (1) Gross Revenue Churn and (2) Net Revenue Churn

Gross Revenue Churn Rate – The Gross Revenue Churn Rate shows only the actual loss to a startup’s revenue. You can calculate it by subtracting the MRR of the startup at the beginning of the month by the MRR of the startup at the end of the same month. Then, you multiply this value by 100 and divide it using the initial MRR to get a percentage rate.

Net Revenue Churn Rate – Net Revenue Churn Rate is basically the same as for Gross Revenue Churn Rate except for the fact that it blends any other additional upgrades to lower the revenue lost. You can calculate the net revenue churn rate in a similar manner to the formula used to calculate the gross revenue churn rate. The only difference is to further subtract the additional upgrades from the value by subtracting the two MRR values.

10. Retention Rate (Customers/Users)

user retention rate

Retention rate is another key business metrics for startups. It is the rate at which a startup retains its customers over some time. This metric is helpful to know how the product has performed, whether the customers were satisfied or not. If yes, then the retention rate will increase. The retention rate metric is vital for startups that have subscription-based business models.

As the owner of a startup, you shouldn’t be just obsessed with acquiring new customers. Startups must retain their customers, as it would be a waste of investment and time to lose their new customers only after a brief amount of time. If you check your CAC and the monthly revenue, you will know that retaining old customers and profiting from them costs less than acquiring a new customer.

Retention Rate also acts as feedback and gives you a better idea of how satisfied your customers are with your startup’s product or services. You can make sure to ask your customers about their opinions on your startup and the products and services it provides. You can ask your customers for ways to improve your startup or for the things that they like and enjoy the most. This will give you an idea of what to change or what factors to continue investing in.

Calculating The Retention Rate

You can calculate your retention rate by choosing a specific period and then subtracting the number of new customers acquired from the total number of customers. Then, divide that value using the number of customers at the start of the period. The formula is given below:

Retention Rate = ((Number of customers at the end of the period) — (Number of newly acquired customers)) / (Number of customers at the start of the period)

11. Average Sales Cycle Length

The average sales cycle length indicates the time it takes between starting a sales contract and concluding the deal. If the average sales cycle length is longer than usual, then it could mean that there might be issues with your sales processes. The average sales cycle length of different companies varies widely depending on the type of company they are or the products and services they sell.

To get a fair assessment of your average sales cycle length, you can compare your startup company with other similar companies. It is good to have a steady average sales cycle length. However, it may sometimes vary due to various factors or over certain periods. For example, your startups are constantly growing, and sales teams expand gradually and improve over time. These are all factors that could contribute to changes in the average sales cycle length of your startups.

Calculating The Average Sales Cycle Length

In order to calculate the average sales cycle length, you need first to work out the time you spend on each sale. Then, calculate the average by adding up the total time spent on all sales and dividing it by the number of sales.

Given below is a clearer picture of the formula:

Average sales cycle length =  Total time between first contact and sale for all sales/No. sales

12. Lead Velocity Rate

Lead velocity rate is the growth of leads per month in terms of sales for a startup. It can give you an indication of upcoming future deals. You can compare the lead velocity rate to the number of closed deals to get a clear picture of the leads you successfully converted to sales.

This comparison will give you a better idea of how the growth in the sales channel could further translate to new revenue sources.

Lead velocity rate helps you identify the speed at which your sales channel is growing, enabling you to measure the progress of your startup’s marketing and sales efforts. As your startup gathers more lead velocity rate measurements over a period of time, you can use them to track changes and watch for sudden spikes or dips that occur in correlation when launching new campaigns.

An important thing to keep in mind while calculating the lead velocity rate is that the rate may grow dramatically at first. However, with the onset of time, and as your company grows, your lead velocity rate will likely slow down or become steadier, despite the rise in the numbers of leads.

Calculating lead velocity rate

[[No. qualified leads this month – No. qualified leads last month] / No. qualified leads last month] X 100 = Lead Velocity Rate (%)

Conclusion

Monitoring your startup using different key metrics for startups is very significant in tracking progress. It gives you a clear idea of what works and what does not work. This will help you make better decisions when investing in the different aspects of your startup. Overall, making better decisions from understating growth metrics will help you find stability in maintaining your startup and keep it profitable. As your startup company evolves and progresses over time, you should also remember to adapt your key metrics for startups with the resulting changes.

Scaling Partners – Who We Are

At Scaling Partners, we are experienced at scaling startups. 

Scaling Partners helps you bridge the knowledge, process and gaps in your business. Connected services. Hands-on solutions. Real experience. 

We know business growth isn’t easy. But we make it easier. Faster. More sustainable. How do we do that? By partnering you with the processes and insight you’re missing and the people who’ve been through it all before. And because we do it as a service, it’s brilliantly affordable.

Learn more about how we support startups with their growth and International Expansion.

Photo by StartupStockPhotos on Pixabay

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