You might be running a C2C marketplace for selling off your old CDs or a B2B marketplace to exchange industrial spare parts, no matter the case, analyzing metrics is crucial to achieving growth. Some of the world’s biggest startups include marketplaces, such as Uber, Didi Chuxing, and Airbnb, which would never have reached that milestone unless they knew how to get each metric to grow. Here follows a guide on how to break down your business piece by piece to identify the metrics that are important to you. This article follows up on How to Get Started with Metrics, if you haven’t read it, I recommend you do that before getting through the article that follows here.
To achieve your goal of fast growth, you need to realize that a business is full of levers to pull and push. It is crucial to identify these connections that can help you push the needle in the right direction. To connect your actions to what can actually achieve growth, it is useful to recognize correlation and causation relationships between the different metrics. This example dashboard will help your startup team to each month easily understand what has happened to your business and make you better at taking the right decisions to succeed.
This dashboard might not fit your exact business model and Excel is definitely not the optimal tool to use for your recurring metrics reporting. I recommend you use this dashboard as inspiration for when you build up your internal reporting in a Business Intelligence tool. To be able to look closer to this dashboard, please download it here.
Here follows a screenshot of a breakdown of an example marketplace, let’s say that it is a B2C marketplace, similar to Uber or Deliveroo. As you can see, the tree is large with many branches, and compared to what we see in a subscription business it has more levers to work with to achieve growth.
Let’s start from the top and then we’ll work our way down.
This is the income of your startup. Note that it is not called MRR as the revenue of a marketplace is not recurring. The revenue of this startup was last month 1200€, to the right of that number, you can see the change since the month before, which was 20 %. This online marketplace did a great job during the past month of increasing the revenues, but how did they manage that? In line with the logic of the metrics tree, you will discover that each number is based on the metrics beneath. So then obviously your revenue equals to your GMV x take rate.
This is the average commission that you take from each transaction. If you are like Airbnb or Deliveroo, you might further split up the fee between buyers, suppliers, fixed fees and commissions. It is especially important to track this metric if your take rate varies since it is strongly affecting your revenue. Increasing a take rate from 1 to 2 percent might not sound much but it would double your revenues.
GMV — Gross Merchandise Value
This is your total marketplace’s turnover, where you, in turn, take a take rate. This is the metric that contains the most levers that you can work with to increase your revenue. Many investors find this metric more important than the actual revenue of the company since it gives a truer picture of how much attraction the marketplace has.
AOV — Average Order Value
The Average Order Value tells you the average size of each transaction in the marketplace.
The number of transactions realized in the marketplace, excluding the canceled orders.
Depending on your market, this number can be very significant, while on others it only makes a minor difference. You should anyhow keep this metric under control and optimally find out the reasons behind your cancellations to avoid them in the future.
This is the number of planned transactions, but including the later canceled orders. This is afterward split up into buyers and suppliers to identify how we arrived at this number of orders. To simplify, I will only explain each metric once since they are very similar to both the buyer and supplier side.
These are the numbers of users who have been active during the last month split up on buyers and suppliers. Our base of users will be further split up further down in the tree.
This is a number that differs a lot depending on your market and the kind of products that are traded on your marketplace. For example, if you are Airbnb, your buyers probably do on average one transaction per year, while if you are Uber, your suppliers (drivers) have many transactions every day. It is in any case important to increase this metric, a high frequency in your marketplace proves that your users see a high value in your service. Your benchmark for this metric should always be compared to how your users consume your type of services. As an example, if you are Uber and your average user needs a taxi once a week, that should also be your desired frequency.
This metric is something that many founders put a lot of weight on, but it is a typical vanity metric. Just because a user is registered, doesn’t mean the user finds any value in your marketplace and will therefore not generate any revenue for your company. Instead, the value can be found when combining it with the activation rate or splitting up the users into different groups. Read on how to turn this vanity metric into sanity metrics.
This is the ratio of registered users who were active this month, this is a very relevant metric as it can prove that you provide high value to a large part of the population. The activation rate is also important since it can give you a prediction of the future. If you manage to activate 30 % of your users every month, as in this example, it means that you can forecast the potential revenue of the next city you expand to with much more security than if your activation rate was unknown.
For this metric, you need to set your own definition to decide what you consider being a warm user. The idea is to find the difference between users who come back regularly (even if it’s seldom) and the users who seem to have forgotten about you. You want to explore this metric to learn more about the expected lifetime value of your new users. If you’re starting out, you will have to decide on the maximum number of weeks or months that you expect between orders of a warm user. What do you consider is a relevant frequency?
When you have more users and you have been active for some time you can do a more relevant estimation. To know when this usually happens, study the chance of a user to come back at different moments in time. For the users who made an order a year ago, what is the chance that they came back for a second order one week, one month, three months or six months later? You will probably arrive at a moment when the chance is very close to zero and doesn’t seem to decrease any more, that would be your definition of a warm buyer. Let’s say that this happens after six months, it means that any user who hasn’t been active in a six-month period gets passed on to a cold buyer or supplier.
These are the users that are no longer defined as warm users since they haven’t been active during the predefined period. It is, of course, preferred to keep this number as low as possible, which means that your users stay active.
If you are managing an online marketplace of consumer discretionary, it might not make sense to work with warm or cold buyers. Then you should probably skip this layer in the metrics tree and rather focus directly on converting leads.
Cold Buyer/Supplier Rate
When dividing this month’s new cold users by the total number of warm users, we find the rate at which users go cold. Thanks to this calculation, we can later calculate the LTV (Life Time Value) to know what each customer is worth to us, see more below.
This is the number of new users for this month and shows the result of your marketing funnel.
Site Visits and Conversion Rate
This is the number of visitors on the two respective landing pages — buyer and supplier landing pages. And even more important are the conversion rates, this tells you a lot about the efficiency of your landing page and on-boarding experience. Improving the conversion rates even a tiny bit can have a huge impact on your final revenue, without having to spend more on marketing. Seeing an increase or decrease in your conversion rate can quickly be connected to changes in design, communication or features and it is, therefore, an excellent actionable metric.
Here you see the amount that you’ve spent on acquiring buyers or suppliers. According to the rule, you should include all costs linked to acquisition, so everything from ad spend to sales representatives. Many early-stage startups, anyhow, do not include the salaries of their growth hackers and sales hires.
Apart from the tree, a couple of other important metrics should be highlighted, as seen in the box in the top left corner. The first is the buyer-seller ratio, an important balance to find for online marketplaces to grow efficiently. Since you need buyers to attract suppliers, and suppliers to attract buyers, you risk being stuck in a Catch-22 situation.
Your first issue, though, is deciding on what your balance should be. Again, it depends completely on what you’re selling at your marketplace. For example, if you’re Airbnb and have suppliers renting out their apartment on average four times a year and buyers renting on average once a year, your balance should probably be one supplier on four buyers. It is important to keep an eye on this metric to make sure that you keep the balance and grow both sides of the marketplace.
CAC — Customer Acquisition Cost
Here we see our marketing cost per new customer. It is calculated by taking the total marketing spend and dividing it by the number of new users.
LTV — Life Time Value
This is the total value that you can assume from every new buyer or seller on-boarding your platform. It might not appear obvious how to calculate it for a marketplace, compared to a subscription service where it is much more straightforward. For your online marketplace, you put together your metrics for AOV, Activation Rate, Frequency Rate, Warm Users, Active Users, Cold Buyer Rate, and your Take Rate to calculate the LTV. If you have any transaction cost, such as Deliveroo has for the delivery, you will need to subtract that cost out of your AOV before including it in the LTV equation. As earlier mentioned, if you’re a marketplace of consumer discretionary you might have to do things differently and just use your gross margin per transaction as an LTV since the repeat probably is very low.
This is a very important metric since it gives an insight into the startup’s profitability and future potential. By dividing our Life Time Value by our Customer Acquisition Cost, we get a quite good idea of the profitability level of a startup whose main variable cost is marketing. The recommendation is to be at least at 3–4 but the higher the better. Having a satisfying LTV-CAC ratio means that we get back the money we spend on acquiring a customer and can organically finance acquiring more customers. As this metric reveals both the efficiency of the marketing and sales funnel and the value customers find in your service, it is a great number to be able to show off to investors. Some people believe that when a business has managed to achieve a good LTV-CAC ratio, it means that the product-market fit has been found which means that you have found a sustainable business model and it is time to hit the accelerator.
Originally published at actionmetrics.co on December 17, 2017.