Startup metrics are one of the most critical, and often misunderstood, aspects of building a strong startup. Antoine de Saint-Exupéry once said, “a goal without a plan is just a wish.” To get their startups to where they want them to be, founders must develop a strong plan or roadmap for growth.
In launching a startup business, entrepreneurs track data so that they have an idea on how they are doing. The data they track is known as startup metrics. For founders, startup metrics are not the plan, but rather, the mile markers that chart progress and growth.
This is important, but many founders often make the mistake of tracking the wrong startup metrics. These false metrics are typically referred to as vanity metrics. Tracking vanity metrics can lead to a false sense of success. Vanity metrics are simply statistics that look good on paper, but do not really mean anything important. Don’t be fooled. If you focus on startup metrics that don’t matter to investors or just aren’t relevant, you’ll simply be setting yourself up for failure.
The problem with vanity metrics is two-fold:
- They are easily manipulated.
- They don’t correlate to anything meaningful.
Some of the most common vanity metrics ill-informed founders often use include tracking the number of:
- Registered Users
- Raw Page Views
- Social Media Likes
- Trial Users
- Number of Email Subscribers
On the other hand, meaningful startup metrics help you understand your overall progress in gaining traction and achieving your startup’s product development, growth, revenue and profitability goals and objectives. By using meaningful startup metrics, you can develop better understanding of whether your efforts are working. Focusing on these startup metrics can help ensure that your startup stays on the proper path to success. Meaningful startup metrics are also essential if you intend to attract investors, other types of outside funding, or even high-quality employees or team members. Startup metrics are sometimes referred to as “KPIs,” or Key Performance Indicators.
In no particular order of importance, here are some of the most commonly-used meaningful startup metrics:
- Burn Rate: This is the operating loss per month, or negative cash flow. Burn rate helps founders and investors understand how much capital the startup needs to keep operating and to grow. This is critical to understanding the timeline for fundraising. Calculating Burn Rate is a multi-step process that can be easily managed using Excel. Here is a short video tutorial that walks you through the process.
- Revenue Run Rate: Founders calculate the Revenue Run Rate by converting monthly or quarterly revenue into an annual dollar amount. This is a forward-looking startup metric that is a projection based on a current baseline.
- Customer Churn Rate: This refers to the number or percentage of customers lost over a specified period of time. You can calculate your Monthly Customer Churn Rate by dividing the number of customers lost in a month by the prior month’s total.
- Customer Lifetime Value: This startup metric is often referred to as LTV. It measures the dollar value of each customer over time. Here is a simple way to calculate LTV: (Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer).
- Conversion Rate: Instead of using a vanity metric like page views, as a startup metric, the conversion rate tracks the number and percentage of website visitors that actually convert to customers. The best way to track the conversation rate is to monitor conversions by individual page, not just overall. Page-by-page tracking gives you a much better understanding of what’s working and what isn’t working so well. You can use a tool such as Google Analytics to calculate your Conversion Rate by page.
- Customer Acquisition Cost (CAC): This startup metric tracks how much it costs your startup to acquire each customer. It reflects the total costs spent on acquiring more customers in relation to the number of new customers acquired.
- Proportion of Mobile Traffic: In our world today, our time is increasingly being spent on mobile. Consider the number of visits from mobile and compare the total number of visits to your product. Nearly every company that targets consumers consulting with investors needs mobile strategy. It is essential.
- Average Revenue Per User: This startup metric tracks the average amount of revenue each user or customer is providing. If the ARPU is rising, then it means you are earning more sales per user or customer. A declining ARPU can be a sign of trouble.
- Net Promoter Score: This is customer satisfaction metric. It shows how satisfied your clients are with your product and your overall capability. NPS measures the likelihood that your customers will recommend your product or service to others.
- Daily Active Users (DAV) or Monthly Active Users (MAV): In the world of vanity metrics, the number of signups or registered users is often touted as traction. But tracking this metric is meaningless because we all know that just because a user signs up or registers, it doesn’t mean that he or she is actually using the product or service. Instead, founders should track DAV and/or MAV. These startup metrics show the number of users or registrants who are actually using your product or service, which is far more important to tracking success.
- Retention by Cohort: This is an important, but often overlooked, startup metric. It measures the number and percentage of original users that continue to use your startup’s product or service. This is another measure of customer satisfaction demonstrating that your customers actually like and use your product and service. Combined with DAV and MAV, it provides valuable insight and demonstration of traction.
- Average Wallet Size: This startup metric refers to the overall amount that a customer can spend in a span of time for a group of services. It is important because it gives a sense of the financial capabilities of your customers, and it allows a venture capital to judge how expensive your product is relative to a customer’s desire. AWS is important for enterprise startups.
- Recurring Revenue – Monthly (MRR) and Yearly (ARR): This startup metric tracks the monthly and annual total of recurring revenue derived from customers. MRR and ARR only track recurring revenue (e.g., subscription fees), not one-time sales.
- Gross Margin: This metric represents the difference between total revenues and cost of goods sold.
- Cost of Goods Sold (COGS): This metric represents direct costs that can be attributed to the production of the goods your startup sells. The COGS include the cost of materials and direct labor and is often calculated as follows: beginning inventory + the cost of goods purchased or manufactured = cost of goods available – ending inventory.
While these are certainly not all of the meaningful startup metrics that founders use to track their startup’s growth, we have covered most of the more common ones. As a founder, you have a responsibility to yourself, your team, your customers and your investors to choose your startup metrics carefully and wisely. Whichever ones you choose, they must be objective, relevant and meaningful.
Interested in learning more how to choose the right startup metrics for you? Contact me today and let’s talk.