The business world evolves faster and faster and many startups blame lack of time as the reason why they do not make the right decisions. However, in the startup world, there are some key metrics that have special importance given that the periods of time in which changes occur are very short, on the order of months and even weeks.
Studying some metrics in different time periods, observing the response of consumers to our products or services and acting on the results is the basis on which a startup must make decisions in one direction or another.
In The Startup CFO we have written this article so that you know the most important metrics that you should look at when analyzing the economic growth of your startup.
This parameter refers to the number of new clients or users that we get each month.
To analyze the health of our acquisition we must also analyze it in terms of potential users by traffic source (Source Acquisition, AF) or in number of leads captured and their conversion.
We can measure this AF thanks to tools such as Google Analytics, which automatically separates the users who come to our website from the different sources of traffic.
The best indicator that our startup is growing is that the acquisition increases steadily over time.
This metric tells us our ability to convert our new customers into loyal customers.
It is a fundamental metric for your business since it is much easier (and cheaper) to retain a current customer than to get a new one.
Related to this parameter, the churn rate tells us what percentage of users stop using our service in a given period of time.
To calculate the churn rate, we must apply the following formula during the period that we want to analyze in our startup:
Churn Rate = ((initial customers + new customers) – final customers) / initial customers
When analyzing it, we must also bear in mind that there may be different reasons why a customer stops having our service: because they are dissatisfied, because we have already resolved their need or other causes.
This parameter tells us the number of times your customers buy on average each month.
It is a more important metric in some businesses than in others, since it will depend on the type of product or service that we sell. For example, recurrence is important for an eCommerce, but not so important if we sell software that is billed annually.
For the companies in which it applies, it is a parameter that must grow over time or, at least, remain high.
Monetization refers to the average purchase ticket of each customer.
Depending on the type of business, it must grow or stay as high as possible.
The margin tells us the net profit we get from each sale by subtracting the associated costs (infrastructure, commissions, etc.).
Depending on the type of business, it must grow or stay constant.
Customer Acquisition Cost is one of the most important metrics that we must take into account since it tells us how much money it costs us, on average, to attract a new customer within a given period of time.
Given that each market and each business has its own characteristics, this parameter only has value when we compare it with other time periods of our startup or with other competing startups with a similar business model.
This metric allows us to know how much money we have invested in attracting a new client and therefore compare it with the return of that investment over time.
In order to calculate it, we must add all the investments we have made in attracting new clients and divide this amount between the new clients obtained during the period analyzed.
Actions aimed at attracting new clients can be both offline and online, including hiring salesmen, online advertising, advertising in traditional media, SEO optimization, affiliate commissions or others.
The CAC value will be higher or lower depending on the type of business.
One of the most important key metric is the Customer Lifetime Value (LTV), which indicates the net revenue that we will obtain from a client during their life cycle on average.
This amount of money includes both past sales and those we expect to obtain from that customer while it is still our customer.
This metric is of vital importance because it allows us to assess the customer’s profitability and complements the information given by its acquisition cost (CAC).
If a business has a very high CAC, it is normal that the LTV is also high. The usual thing in a business that works well is that the LTV / CAC ratio is greater than 3.
To calculate the LTV, we must know the average income of the client in a given period, the percentage of gross margin (discounting the costs directly related to it) and its life cycle:
LTV = (average revenue / month) x average gross margin x life cycle in months
In other words, the LTV defines our ability to monetize each client.
This parameter allows us to evaluate how much money our startup gets yearly for each euro invested in attracting customers.
This parameter must always be greater than 1 because if not, every time we attract a client we are losing money.
This parameter tells us what the startup’s net monthly expense is in terms of cash, thus allowing us to estimate the startup’s lifetime with current financing.
Knowing the burn rate we can know when we will need a new round of financing.
The runway allows us to know how many months of cash we have left based on our current monthly burn rate. It is calculated by dividing the total amount we have in cash by the burn rate.
Although you have already seen that there are many metrics that we must study in order to analyze the progress of our business, Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV) are the two most important metrics that you must take into account.
If you want your startup to be a viable business model in the long term and get funding for future rounds, you should strive to reduce CAC as much as possible while LTV remains stable or even increases.
At The Startup CFO we help startups to prepare a business financial plan and study the evolution of their metrics every month in order to make the best decisions to be able to access new rounds of financing and continue growing.
So if you have a startup and you think we can help you, we invite you to contact us.