In the startup world, you will inevitably hear from everywhere and everyone that you should be data-driven and understand the key metrics for startups.
The thing is, using data analytics is not simply a modern way of growing a business, it’s just the most optimal way to do so. Regardless of your area and level of expertise, this article will help you gain a good understanding of what should be tracked and measured in your start-up and how it will help you run a smarter business.
1. Clients /users/ growth rate
At the beginning, for a startup, it’s better to focus on growing the customer base or users than focus solely on revenue. This metric is especially important if the product/service is not monetized yet.
Formula: Number of users in most recent period / number of users in previous period * 100
Rather than having just a plain number, I’d suggest having line charts of new and/or total users per day on your dashboard, in order to see at a glance how your user base is growing and spot tre.
Here’s an example of total users bar chart as well as a number that shows the percentage growth since last week.
2. Clients /users/ churn rate
The reverse of the first metric on the list. This shows how many clients or users have stopped using your app/product during a period of time, as a percentage of the number of users that started at the beginning of the period.
The definition of churned is business-specific. In SaaS it’s cancelling a subscription. In a non-monetized app it could be a user that is inactive for 2 weeks. Even similar businesses might have different churn definitions depending on their business models.
Formula: Number of churned users during the time period / Number of users at the beginning of the period * 100
Here’s a sample chart that shows how many customers churn each day. The definition might be >30 days since last login:
3. Customer Acquisition Cost – CAC
One of the most important expense-side metrics is the CAC. It shows, on average, how much it costs to acquire a new customer. In order to calculate this properly, marketing attribution modeling should be set up .
Formula: Total cost per channel for the selected time period / Number of acquired users/customers through that channel for the selected time period.
If there are additional costs to acquiring a customer, they should be added to the numerator.
Here is an example of how the CAC is calculated for a single marketing channel.
CAC=Cost/Sales (1 sale= 1 customer in our case):
4. Customer Lifetime Value – LTV (or CLV, CLTV)
This is the reverse of CAC – it shows, on average, how much money a customer is going to generate until they churn (see churn definition above) or until a certain time-period has passed – 30, 60, 90 day LTV. This is important for marketing teams because it is the foundation of the marketing ROI formula. A logical rule of thumb is that you should aim at an acquisition model where LTV > CAC.
Formula: Average revenue per customer per month X Average customer lifetime / Number of customers
5. Gross Revenue Per Month
This is the sum of all sales you made during the month. It’s maybe the most well-known metric. However, depending on your business model, this metric might not be important for you at the early stages of your startup. If you plan to first attract a significant amount of users and then monetize that user base, then user-related metrics are far more important .
An example of such a business model is the two-sided marketplace (think Ebay). If you have only 2 sellers on your platform, chances are, you won’t get many buyers as well, hence, revenue. You need to attract critical mass of users – buyers and sellers – in order to have a well-functioning marketplace. After that you
Formula: sum of all revenue for the month
Best visualized with a bar chart.
6. User/Customer satisfaction score
Customer satisfaction is one of the prerequisites for growth and profitability. This is why it’s extremely important to track how content your customers (or users) are with the value you offer them. This has several implications.
First, the more satisfied they are, the more likely they are to pay, or continue paying for, the value they receive.
Second, they’d be more likely to recommend you to other people, which drives the Viral Coefficient up as well as your newly acquired users.
There are different ways to calculate how satisfied users are – quantitative as well as qualitative. I won’t dig deeper here on positives of both, I’ll just mention that both can bring valuable insight for any company size.
Most popular methods include direct surveys to users, such as how do you rate us or would you recommend us to a friends questions.
It’s important to track the same metric and see how it changes over time, how it changes with adding new features, and also what differences there are between user ÔÇ£cohortsÔÇØ (segments).
7. Conversion rate
This shows in % how many visitors to your app/site performed a certain action.
Examples of that action are subscription, clicking on a CTA button, becoming a customer, etc. The metric could be applicable to various scenarios and track different conversions.
Conversion Rate is very useful for A/B testing because that way you can measure the real impact of design or presentation changes you make to your app or site and how it affects your users. Using it, you can iterate over and over again and measure the outcome, in order to find the version your users like the most.
Having said that, having a low Conversion Rate doesn’t necessarily mean the product or service is bad. It could often be attributed to design choices and the presentation of your product/service.
Keeping the same logic of comparison in mind, another area where Conversion Rate is useful is at comparing marketing channels and audiences. By measuring conversions rates of different audiences, you can identify audiences that convert better than others. This most probably points to your ideal target audience. By measuring conversions rates of different marketing channels, you can identify marketing channels that are most optimal for your marketing base.
Formula: Number of converted users / total number of visitors * 100
8. Funnel conversion rate
A single conversion rate in some cases is not enough to tell the whole data story. That’s why I’ll introduce to you the funnel – a metric model that tracks user journey across a site/app.
Let me explain it with a short example. You post an ad for your website. 1000 people see it. 500 clicks on the link. 200 subscribe to your newsletter. 10 become customers. 2 become repeat customers. Do you see how the number narrows down with each consecutive step? That’s exactly the funnel. The conversion rates are calculated as number of users on the current step / number of users on the previous step.
There are different types of funnels. The most common are the marketing and sales funnels. However, it could be applicable to any situation that follows a certain user journey.
The funnel is useful in tracking conversion rates between the steps and can reveal points of high churn, which after further examination can lead to actionable insights.
Here’s an example of a funnel. It represents another very common user journey:
9. Net profit margin
Net Profit Margin is basically the metric that determines whether your business is profitable or not.
It’s pretty straightforward and shows what percentage of your revenue is profit. It could be <0% in some cases, especially for young startups. The goal is to push it to above 0%, otherwise it is a business that’s losing money. Net Profit Margin is a useful metric to see how efficient your business is. It’s important to keep in mind that the profit margin varies across industries.
Formula: Net profit / Revenue * 100
Because many start-ups start with negative profit, maybe link/remind readers of other points on this list that could help them start to make profit (building customer base, for instance).
10. Runway (applicable for not-yet profitable startups)
Every plane has to takeoff before the end of the runway, otherwise it’s will crash, right? Well, the same applies to startups. The business has to become profitable (or receive new funding) before the cash is over. This is the metric that tracks how many months you have left with the negative net profit you’re making. Or, in other words, how much time you have to become profitable or to raise another series.
Formula: Cash on hand / (- Net profit)
Example: $120 000 in the bank, $12 000 expenses per month, $2 000 revenue per month
Runway = 120000 / -(2000-12000) = 12 months
Those 10 metrics are among the most optimal ones for startups to track, especially companies that are just starting. Although startup life might be messy and hectic, having certain metrics as a guiding star can focus your team efforts to the most productive activities so that you grow your startup faster and smarter.