In this third article of the series Metrics Your Startup Should Track, we will focus on the aspect that is the most important to founders and investors – the financial metrics. These metrics are important for founders, in order to track different aspects of revenue and expenses their company generates. These metrics are also viewed by investors who want to evaluate the startup and decide whether to invest in it.
Keep in mind that some of those might not be applicable to your startup yet, if you at an early stage where you are focused on growing your user base, adding new features, polishing your offering and you are not generating much revenue, if any. In later stages, most of the metrics mentioned below will become applicable to your business and you can start tracking them.
1. Average Revenue per Customer
Shows how much revenue the average customer brings in. This is particularly suited for B2C businesses and B2B where you have tier pricing and most clients are relatively the same size. If you are in the B2B market with clients of significantly different size, then I’d recommend doing a Pareto chart, that will show you what percentage of your revenue comes from your biggest customers. I will show you how to calculate it in a future article of the series, so make sure to subscribe to our newsletter!
The formula is very straightforward – you just divide total revenue by the number of customers that brought in that revenue. Track on a weekly, monthly or quarterly basis – depending on how often you make sales, especially if you are a B2B company.
Best visualized with a bar of a line chart.
2. Monthly Recurring Revenue – MRR
A lot of businesses, especially SaaS ones, have a subscription-based billing model. That means they have a regular stream of income every week, month, quarter or year. This is a win-win situation for both the business and the customers. The subscription model makes it easy for the customer to be subscribed only until they need to use the service/product. That way they won’t end up owning a piece of software for years that they needed for just a few months. The model is also good for the businesses as they will receive a regular stream of income. This makes planning easier and is also an incentive to keep developing the product and adding new features. The Monthly Recurring Revenue shows what is the recurring income flow to your company each month (excluding one-time fees). If you charge per month of usage, the calculation is pretty straightforward. If you charge on an yearly basis – then you divide by 12.
Let me illustrate with a simple example. You charge clients €100 per month to use your website on the monthly basis plan. You have also a yearly subscription which is €1000. Let’s say you have the following customers:
|Month||New customers on the monthly plan||New customers on the yearly plan|
Let’s say, for the sake of simplicity, that we start with 0 customers and we have no churn during those three months.
This will be the MRR per month and the respective calculation for it:
|February||566,66||4*100 + 2*(1000/12)|
|March||750||5*100 + 3*(1000/12)|
For MRR and ARR, which comes next, there will be a dedicated article that explains all minute details and different types of MRR and ARR (there are 5 sub-types) along with the way to calculate and visualize them. So don’t forget so subscribe!
3. Annual Recurring Revenue – ARR
Parallel to the MRR, this metric shows recurring income flow to the business on an annual basis. I will again use the same example to illustrate it. Again, the same assumptions apply.
|Month||New customers on the monthly plan||New customers on the yearly plan|
This will result to:
|February||6800||4*100*12 + 2*1000|
|March||9000||5*100*12 + 3*1000|
ARR shows how much revenue you would generate with current number of subscribers and no churn, for a year. Knowing MRR, it is very easy to calculate the ARR and vice-versa.
4. Revenue Growth Rate
Straightforward as it sounds, it shows what is the growth of your revenue, period over period, as a percentage.
Formula: (Revenue from the current period – Revenue from the previous period) / Revenue from the previous period * 100
Track on a monthly basis.
Best visualized with a bar or line chart.
5. Total Addressable Market – TAM
Whenever you pitch in front of investors, you will often be asked to show your Total Addressable Market value. This shows the total market size your startup is chasing, assuming you won’t diverge in other areas. For example, if you produce bubble gum, your TAM would be the sum of all bubble gum sales from all producers for the most recent year. Calculating TAM might be difficult for disruptive startups that focus on innovation and try to create a new niche. For example, if you create a mind-reading device, you have to make a lot of research and assumptions in order to arrive at a TAM figure.
The goal of any business, including startups, is to expand their market share and capture more from the pie that is called TAM. It’s important to investors, because even if the startup team and the idea are great, small TAM might mean there is no opportunity to grow.
How to calculate:
– for most of the markets there is available information online about the market size (=TAM)
– if your startup is offering a product/service with no existing alternatives (like the example I mentioned above) then you’ll need to use assumptions and research in order to approximate the TAM.
Be aware that the value of TAM changes. Usually slowly, but for rapidly growing industries might expand several times in a matter of a year.
6. Net and Gross Profit Margins
You are already familiar with the Net Profit Margin from our first article of the series. In addition to it, which shows what percentage of revenue actually becomes profit, there is another profitability metric – Gross Profit Margin. When we calculate Net Profit Margin, we subtract every expense from revenue – including cost of goods sold, administrative, marketing, selling, R&D, interest cost and other expenses, if there are. In contrast, to calculate Gross Profit Margin, we subtract only the cost of goods sold from the revenue generated (thus the name ‘gross’).
The Gross Profit Margin shows how efficient the business is in terms of revenue generation.
Formula for Gross Profit Margin: (Revenue – Cost of Goods Sold) / Revenue * 100
Track on a quarterly or a yearly basis.
Best visualized with a bar chart.
You can also visualize the last period on you dashboard as:
7. Revenue per Employee
This is one of my favorites, as it shows the efficiency of your company in terms of employee productivity. The higher the number, the better you utilize your human capital. Generally, Revenue per Employee is compared in time, so that you can see how it changes. It could also be compared to that of competitors (if available publicly). Keep in mind though that it could be skewed if a company is relying heavily on outsourcing a lot of their activities as this could lower the employee count significantly.
Formula: Total Revenue / Current Number of Employees
Track on a quarterly or yearly basis.
Here is an example from our HR report, which you can check here:
NB: The following two metrics are usually used in businesses that produce material products.
8. Overhead costs
In almost every business there are two types of costs – fixed and variable. Fixed are costs that are marginally affected by how much is produced – such as rent, electricity, water, some employee costs, etc. If you produce 1 or 1000 toys, you will pay the same amount of rent, for example. It’s important to monitor and optimize these costs as they might eat up your profit if situations of low demand, hence, low production hit (Corona, for example). I’d recommend trying to make overheads as variable as possible. For example, try to negotiate with the landlord for a shorter notice period. That way your bottom line would be less affected when something unexpected happens and you need to scale down.
How to calculate: sum all expenses that are not marginally affected by how many units you produce and are relatively flat. Track on a monthly basis. Take into account the production output.
9. Variable costs
Continuing with costs, the other type is variable costs. They are fully dependent on the output of the production – they increase marginally with every additional unit of production. For example, for every toy you produce, you need 300g of textile. The cost of textile to your company is a variable cost – it fully depends on how many toys you produce or plan to produce. Trying to minimize this cost will ensure you have better profit margins.
How to calculate: sum all expenses that are marginally increasing with every additional unit of production. Track on a monthly basis.
10. Gross Merchandise Value (GMV)
This metric is relevant to businesses that operate as two-sided marketplaces. Think ebay. In this business model, the more buying and selling is happening on the platform, the more revenue for the business (in most cases).
GMV tracks what is the total value of all goods and/or services that changed hands during a specific time period. For the aforementioned business model, this is one of the top metrics they must track, as it shows basically the usability of your service. The higher GMV, the more utility your users find in your marketplace.
How to calculate: sum the value of all goods and/or services sold during a specific time period. I’d suggest calculating hourly GMV, and then aggregate upwards to a year.
As you’re developing your startup, you already know how important financial metrics are for measuring growth, pitching to investors and in general, seeing whether the product/service is valuable to end users or not. The list above will help you start tracking the most important financial metrics in your startup. If you need help bringing your data together to visualize these metrics, we’d be glad to help you. You can book a free call here.