Key Performance Indicators: 9 Business Metrics Every Startup Should Watch
Starting a business is difficult, but nowhere near as difficult as making all of the right decisions to to move on from startup status to an established industry presence. In order to make better business decisions, you need information. As a small business owner in today’s digital age, you have unprecedented access to the information you need; you just have to know what to pay attention to and what to ignore. Here are nine of the most important business metrics for startups to watch:
1. Customer Acquisition Costs (CAC)
Your CAC is a critical metric in the early stages of growing your business. You need customers in order to make money, but in order to acquire customers you will likely need to invest resources into marketing. Your CAC is the amount of money you need to spend in marketing, on average, to gain a new customer. It is simple to calculate, but the result might not be what you expect. Use Panalysis to determine your customer acquisition cost. You need two numbers: the amount your business spent over a given period of time on sales, marketing, and related expenses, and the number of customers you picked up during the same period. Your CAC is equal to your expenses divided by the number of customers. It will show you how expensive a single customer is to acquire. If your customer acquisition cost is too high, examine your expenses, cut back in non-performing areas and optimize. Your company website is a start, as many people spend too much on their business site without optimizing it for maximum conversion.
2. Customer Retention Acquiring
more customers is incredibly important. What’s more important is what you do with them once you have them. Too many startups fail because they spend more time, money, and effort on getting new customers and neglect the ones they already have. In fact, while new customers are valuable, current customers are far more so. It costs much more to obtain a new customer than to sell to or upsell a current customer.2 For current active customers, simply ask them what you can do to improve their experience. Customers love to share their opinions, so you will have plenty of information. For inactive customers, those who have slowed or stopped using your product, ask them why. Customer feedback can be valuable for fixing problems and increasing retention with minimum effort.
Every business will lose customers. This is known as attrition, or churn. A 30-day measurement will give you an indication of customers who abandon your product for a short time, but may come back to it later. A 90-day measurement will give you a better idea of the people who permanently drop. Your goal is to contact the people who drop in order to find out why, and then fix the problem.
4. Life Time Value (LTV)
LTV is an estimate of how much one customer is worth to your company. How much will a given customer spend over the course of their time using your product? If you charge a monthly fee for your product, you need to find out how long the average customer stays with you. Here is a good tool to help you estimate the LTV of your customers. LTV is also important in comparison to your CAC — customer acquisition costs. If your CAC is higher than your LTV, you’re losing money. You need to do something to balance them out.
5. Product Metabolism
Product metabolism is a relatively new metric, coined in this blog post. The idea is that your product metabolism is a measure of how quickly your team makes decisions and rolls out updates to your products. Too slow a product metabolism is obviously a bad thing because it means you’re slow to react and will lose customers when their issues go unaddressed. On the other hand, too fast a metabolism will keep both your team and your users in a constant state of insecurity. It can get frustrating to have to update constantly for minor changes. Striking the right balance is key.
Is your startup making money? This is the most obvious and easiest metric of all to measure. If your company is not making money, something needs to change. Whether or not you’re making money, how much you’re making and where it’s coming from are all important. Depending on your product, you may have a harder time achieving higher revenue streams than other companies. Software service companies often have a very hard time as startups. Most users pay incrementally, which means each payment is generally small. Longer subscriptions, advance payments, and a wider exposure are all good ways to boost this metric.
7. Conversion Rate
Also known as your activation rate, this is a measure of the number of visitors who become customers. Depending on your product, you might measure by new subscriptions, subscription renewals, software downloads, or some other flag. A consistent flag is important, so you can see how this number changes over time. High conversion rates indicate that you’re doing something right with your initial exposure, and that people like your product enough to become active users. Low conversion rates indicate there is a flaw or lack of utility in your product that is turning people away. Asking them why they choose not to activate is a good way to find out what you need to fix.
8. Referral Rate
Your referral rate is measured as part of your viral coefficient, but it is a useful stand-alone number as well. The key to measuring it is asking new users how they found out about your product. You can add an incentive for users to refer others easily enough, which will help you get your answers. Some users will say no one referred them even if someone did, so the number might not be completely accurate, but it will be close enough. As your referral rate increases, your CAC decreases. If you’re spending less to acquire customers, you’re making more revenue from them over their lifetime. Everything comes together with your referral rate. If you haven’t already, here are some ideas on how to integrate a referral program into your product.
With all of this information at your fingertips, you can hardly go wrong. Once you know what to look for, you can make all of the right decisions and grow your business from startup to successful leader. Your business will be pulling in a profit in no time.