Key Metrics

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Founders should know their numbers inside out. The metrics of a company should be like its heart monitor, constantly measuring the health of the business. These metrics are always there in the background, but in order to keep the business alive someone has to be geeking out on them and making sure the vital signs are good and nobody’s flatlining. And if they are, the founders should be running a diagnostic and taking action to get them back to full health.

There are many metrics that startups could be tracking, but we’ve included some that investors would ordinarily expect to see in a pitch deck or that the founders have readily to hand and know off the top of their heads.

Customer Acquisition Cost (CAC)

How much does it cost to acquire a customer? See, told you this was easy! Essentially, how much does it cost to get a new customer on board?

The CAC can be worked out by taking the entire amount spent on acquiring customers within a certain period and dividing it by the number of new customers.

Total Marketing Spend/Number of New Customers = CAC

£10,000/500 = £20

This metric can be split down even further to show CAC per channel…

Google Adwords Spend/New Customers from Google Ads = CAC for Google Adwords

And CAC per customer segment…

Marketing Spend on Students/New Student Customers = CAC for Student Customers

CAC provides critical information that can be used for targeting and reviewing marketing strategy, and identifying the most effective marketing channels.

Revenue

Revenue is the sum total sales into a company before costs and tax, etc. All startups will want to see their revenues increasing over time.

Gross Profit

The total revenue into the company minus the cost of actually making and selling the product – this includes obvious things like manufacturing costs and cost of parts, etc. but also any staff costs relating to the creation and sales of the product such as software developers, designers and sales staff. These are often collectively referred to as Cost of Goods Sold (COGS)

Revenue – Cost of Goods Sold = Gross Profit

Net Profit

The total revenue into the company minus all operating costs, tax, interest as well as COGS.

Revenue – COGS – all other costs = Net Profit

Many companies, especially in the early stages will NOT be profitable. They may even see their revenues increasing but their profits decreasing due to expenditure. This is absolutely fine for early stage companies.

It’s also important to note that a company can have fairly high Gross Profit while having low or negative Net Profit, so it’s important to get both numbers.

Monthly Recurring Revenue (MRR)

A critical metric for companies charging through a subscription model. MRR is the amount of predictable revenue coming into the company on a monthly basis.

Churn

Usually presented as a percentage for a given period, Churn is the number of customers who have cancelled their subscription.

Month over Month (MoM) MRR

The percentage growth in MRR per month. This is a really important metric for subscription based companies to show how fast their business is growing

This Month MRR – Last Month MRR / Last Month MRR = MoM MRR

Or with more complexity…

Last Month MRR + New Accounts + Upsold Accounts – Churned Accounts – Last Month MRR / Last Month MRR = MoM MRR

Ouch. That is getting complicated. Let’s see this calculation with some actual numbers in it.

Last Month MRR = £50,000
New Sales this Month = £20,000
Upsold Accounts this Month = £5,000
Churned Accouts = £2,500

£50,000 + £20,000 + £5,000 – £2,500 – £50,000 / £50,000 = 45%

Lifetime Value of Customer (LTV)

The Lifetime Value of a Customer is used to describe the total amount of revenue generated from that one customer. In business models that include one-off purchases, this calculation is very easy… it’s just the total cost of the sale. For subscription-based businesses, it’s fairly straightforward too…

Subscription Cost x Average Lifetime of Customer = Lifetime Value of Customer

For example, a customer pays £20 per month for their subscription and on average, customers keep up their membership for 6 months. Therefore the lifetime value of the customer is £120. This is a very interesting metric when used in conjunction with the Customer Acquisition Cost. Ideally the company’s CAC will be lower than their LTV, especially as time goes on.


Important Notes

  • No one metric can tell the whole story of a startup. They have to be viewed in conjunction with one another.
  • Beware vanity metrics such as x amount of traffic, x followers on Facebook. This information rarely tells you anything about how the business is doing.
  • This only beings to scratch the surface of startup metrics. If it’s piqued your interest look out for our dedicated Startup Metrics course.