Start-up Metrics for Beginners

What are they?

For starters, let’s cover the basics: what are metrics? Investopedia defines them as “measures of qualitative assessment …for assessing, comparing, and tracking performance or production”. You may also hear the term KPI, or Key Performance Indicator used alongside metrics. KPIs are the specific metrics a company, team, or project uses to measure performance.

Why should you care?

Understanding how to use KPIs is essential for entrepreneurs. They are how you set realistic goals for your business and make sure you are on track to reach those goals. They can help signal your strength to investors or reveal areas for improvement.

If you’re an employee of a startup, it may not be immediately obvious why metrics and your company’s KPIs are important to you. However, make no mistake that they have a big impact on your job. If you want to take your performance to the next level, understanding how different parts of your job support the company KPIs and how you can further improve those metrics is a must. It’s also a good idea to know how to use project and employee-based metrics to visualize your performance and communicate that to your boss.

The Magic Metrics you need to know

Psych.

There is no magic formula of metrics that can tell you exactly which KPIs your start-up should track. Every business is different, and as a start-up what matters at one stage might not matter as much in the next. There are nearly endless things you can measure in a company, and it would be counter-productive to track them all. Instead, we’ll focus on a handful of some common KPIs to give you a jumping-off point.

If you want a more exhaustive list of metrics and KPIs, check out this article for 75 KPIs across various aspects of a business, or this one with 34 metrics for startups.

Revenue

It’s hard to ignore your revenue-related metrics. After all, every business wants to make a profit, so tracking what revenue you’re bringing in matters. Depending on the structure of your start-up or your immediate goals, there are several metrics you might choose.

• MRR (Monthly Recurring Revenue) and ARR (Annual Recurring Revenue)
• Gross Profit or Gross Margin (total revenue — the cost of goods sold)
• Deferred Revenue (amount received in advance of earning it)

While you might feel like there’s too much accounting involved in those metrics for you to possibly use them yourself, don’t give up. I recommend bookmarking Investopedia as reference material while you learn these terms.

CAC and LTV

CAC (Customer Acquisition Cost) and LTV (Lifetime Value) are two metrics that go hand in hand. CAC is calculated as (costs of sales and marketing)/(number of customers acquired) for a given period. In other words, how much you spent on obtaining each new customer. LTV is calculated as (average number of months a customer stays with you)/(average monthly revenue from a customer).

These are important to measure together, as a very high CAC and a low LTV spell trouble for a business. David Skok does an excellent job of illustrating the balancing act between these metrics, and how to keep your CAC low while maximizing your LTV. Check out his article here to learn more.

Churn

No, not churning butter. Churn is a measure of the number of customers that stop paying for your product within a time frame. As we see with CAC, it can be expensive to gain new customers, so it’s important to keep track of whether or not they’re staying with you. Tracking when customers churn can also help inform how to improve your retention rate.

Referral

Referral is essentially the percentage of customers that come from existing customers. We already know that getting customers on your own is costly, so it’s not uncommon for start-ups to focus on metrics that measure the health of your organic customer acquisition.

There are other metrics closely related to referral as well. NPS (Net Promoter Score) is slightly more qualitative and uses surveys to gauge how likely customers are to refer your product to someone. Virality/Viral Coefficient measures organic growth by tracking invites/promotions from current customers and looking at the percentage of those that convert to new customers. All of these focus on how your current customer base is contributing to growing your base.

What’s Next?

This article is the tip of the iceberg for learning start-up metrics. We covered some common KPIs that are important to know, but as I said before, there isn’t a perfect formula for picking your KPIs, so don’t assume those are the ones your startup needs. It takes careful planning to choose the metrics that meet your needs, and I intend to help you do that in my next post.

Until then, I challenge you (entrepreneur or not) to think of a goal you have for yourself in the next year and think about what steps it will take for you to reach that goal. How can you measure those steps? (Hint: those are the metrics that matter to you!)