Successful startup CEOs and founders suggest that choosing the right startup metrics earlier in your business is the first critical step to take on an entrepreneurial journey.

Businesses often fail because of poor financial planning and not defining startup metrics clearly. Effective KPIs are the beacons that focus efforts on achieving growth in startups.

Having the right startup metrics in place enables financial experts to track the performance of your business efficiently.

It allows busiesses to receive the most out of their spending, change practices that do not work, enhance practices that do, and ultimately increase business potency and volume with the end goal of an increased ROI.

To help you streamline your business around the most important KPIs for growth, we have laid out five key startup metrics to get you headed in the right direction.

 1. Revenue Growth Rate

Tracking metrics always comes down to revenues and cash flow. Venture capitalists use this KPI frequently to track the growth of a company.

This business metric is helpful for founders and investors alike as it enables them to evaluate your current and potential growth.

Although your business’s growth rate depends on multiple factors, any company with a revenue growth rate of 10% or more is considered good. Though, a 2 or 3% growth rate counts as healthy. By calculating the revenue, the financial experts gain insight into the increase or decrease in sales volume and the business expansion trends.

You can calculate the revenue growth of any company using the following formula:

(Current Period Revenue – Previous Period Revenue) / Previous Period Revenue X 100 = (%) Revenue Growth Rate

Example:

In January 2022, the X Company made $100,000. In December 2021, they made $96,000. Using the revenue formula, determine their revenue growth rate from December to January.

For X Company, that’s:

[ January 2022 Revenue – December 2021 Revenue] / December 2021 Revenue X 100

Numerically, it becomes:

($100,000 – $96,000) / $96,000 X 100

This leads to $4,000 / $96,000 = 0.0417 X 100

As revenue growth is a percentage, X Company’s growth between December and January was approximately 4.17%.

Thus, by reviewing revenue growth by customer type, the company can see which customers have steadily increased their sales and which have slowed sales.

2. Customer Acquisition Cost (CAC)

For a business to be profitable and sustainable, financial experts must actively track your company’s Customer Acquisition Cost (CAC).

CAC is the cost a business incurs to acquire a new customer. This is one of those startup metrics that include marketing and sales expenses, including salaries and other overheads associated with attracting and converting a visitor to a customer.

By tracking each spend channel’s CAC, you could dissect your entire marketing plan and determine the most cost-effective sources that bring more leads.

CAC is difficult to benchmark because it varies by industry, size of businesses, and target customer type. However, a reasonable CAC Payback Period is generally about 12 months.

You can calculate the CAC for your business using the following formula:

CAC = Total sales and marketing expenses / Number of new customers acquired

Example:

An X company spends $300,000 on marketing and customer acquisition-related expenses to acquire customers for their SaaS business. The efforts resulted in 10,000 customers. The calculation goes:

Customer Acquisition Cost (CAC) = (300,000 / 10,000) = $30

The marketing team, in this case, was able to acquire each customer at $30. Financial experts consider the business context in which the numbers are collected and calculate CAC.

Typically, business owners reduce CAC by improving conversion rates and increasing the number of customers acquired. However, you may have a higher CAC in the growth phase.

To improve your CAC, assess your top-performing acquisition channels and focus on those while eliminating under-performing channels.

It’s encouraged to focus your efforts on qualified buyers to more efficiently use your resources.

Moreover, CAC is sometimes overlaid with other startup metrics, such as lifetime value LTV. These two metrics help paint a clear picture of your business’s solvency and help you determine whether you can afford to keep investing in new customer acquisitions or not.

By combining CAC with other operational KPIs and sales performance metrics, you can get more insight into the health of your business.

3. NET Promoter Score (NPS)

The Net Promoter Score (NPS) is a critical metric in tracking the progress of your business.  It allows your company to determine the number of promoters and detractors.

NPS is considered one of the critical customer satisfaction and customer loyalty metrics. Being a valuable metric on a strategic level, startup owners use NPS to get a representative landscape of how their customers think about them.

The score helps businesses improve service, customer support, delivery, etc., and increases customer loyalty. The collected result impacts your future commercial strategy, budget allocation, and product development plans.

In this system, businesses measure NPS by asking the ultimate question:

How likely are you to recommend us to a friend or colleague? The scale rates 0 (not at all likely) to 10 (extremely likely) scores. Depending on the answers, the customers represent three groups:

• Detractors
• Passives
• Promoters
  

The score of 0 and 6 – Detractors

Detractors are unhappy customers. They are unlikely to recommend your company or product to others. They could actively discourage potential customers from buying from you.

The score of 7 and 8 – Passives

Passives are not actively recommending your brand but are unlikely to damage it with negative reviews.

It is interesting to note that passives are very close to being promoters when they give a score of 8, so it always makes strategic sense to spend time investigating what to do to win them over.

The score of 9 and 10 – Promoters

Promoters represent the most enthusiastic and loyal customers.

They are far more likely than others to remain customers and increase their purchases over time. Promoters will likely act as brand ambassadors and advocates for your business, enhance your reputation, and increase referral flows, helping fuel your company’s growth.

How to calculate NPS?

You can calculate Net Promoter Score using the following formula:

NPS = [(Number of promoters – Number of detractors) / (Total number of respondents)] x 100

The NPS is not expressed as a percentage but as an absolute number between -100 and +100.

Example: 

You are running a real estate organization. If you want to find your net promoter score, ask your customers to recommend your services on a 0-10 scale.

The customers will rate you from 0 to 10. Then, you separate detractors (0 to 6) from passives (7 to 8) and promoters (9 to 10). Subtract the percentage of detractors from the promoters’ score for your final result.

For instance, if 10 percent of customers are detractors and 95 percent are promoters, your NPS is 75.

4. Customer Lifetime Value (CLV)

Increasing the value of your existing customers is a great way to drive growth. Your customer lifetime value (CLTV) is a metric to calculate your business growth.

Customer lifetime value is a metric in business that measures how much a customer generates for a business, not just at the point of acquisition but over the whole period of their relationship.

According to an estimate, the longer customers purchase from a company, the higher their lifetime value.  Calculating the CLTV helps business professionals make well-informed decisions and enable them to determine who their most profitable clients are.

When measuring CLV, it’s best to look at the average revenue generated by a customer and the total average profit. CLV provides insights into how customers interact with your business and if your overall marketing plan is working as expected.

For a more in-depth look, you may want to break down your company’s CLV by quartile or some other segmentation of customers. It can give greater insight into what’s working well with high-value customers, so you can work to replicate that success across your entire customer base.

CLTV is a metric that empowers you to keep a pulse of your business. You can calculate it using the following formula:

Customer Lifetime Value = (Customer Value * Average Customer Lifespan)

where Customer Value = Average Purchase Value * Average Number of Purchases

Example:

Let’s take Starbucks as an example of determining CLV. The report measures the weekly purchasing habits of five customers and then averages their total values together.

Total customers: 05

No. of Visits: 04

Total Spent: $20

The average purchase value would be $5.

Their Average Purchase Frequency Rate of the 5-customers was reported at 4.2. However, to calculate the Average Customer Value, you will multiply their Average Purchase Value by their Average Purchase Frequency Rate.

You repeat this calculation for all 5-customers and get the result of $24.30.  The Average Customer Lifespan of the five customers values 20 years.

To calculate the Customer Lifetime Value (CLV), you will multiply the average customer value by 52 as this number represents an annual average visit of 5 customers every week.

Therefore, the Customer Lifetime Value of Starbucks turns out to be: 52 x 24.30 x 20 = $25,272

This lets you know how much revenue the customer is worth to Starbucks within a week. With the CLV stats on your hands, you can forecast profitability, set customer acquisition budgets, and determine goals for growth and improvement.

5. Customer Churn Rate

Customer churn rate indicates the percentage of customers who stop using your product or service during a given time frame.

It measures the proportion of contractual customers of a company who cease their subscriptions or close their accounts over a defined period.

A high customer churn rate cripples a business’s ability to make a profit and affects its return on investment. Businesses should gain more customers than losses in a specific period to cope with such situations.

Depending on the nature of the business, financial analysts consider churn rate as a key startup metric to track on an annual, quarterly, monthly, or weekly basis.

You can calculate the churn rate by dividing the number of customers you lost in a given period by the number of customers you had at the beginning.

Customer Churn Rate = (Lost Customers ÷ Total Customers at the Start of Period) x 100

Example:

If your business had 300 customers at the beginning of the month and lost 20 customers by the end, you would divide 20 by 300. The answer is 0.06.

You multiply 0.04 by 100, resulting in a 6% monthly churn rate.

According to David Pakman, former CEO of eMusic and co-founder of Apple Music Group, now a partner at VC firm Venrock, the optimum monthly customer churn rate is 5 percent or below. However, few companies achieve this.

As customers are an integral part of any business, companies need to understand churn if they want to grow and adapt to meet their customer’s needs.

Final Thoughts:

With effective startup metrics identified in your business, you can track your business efforts efficiently and allocate critical resources for future growth.

Tracking processes will allow business leaders to understand what practices are beneficial and what are not. Analytics gained from tracking startup metrics will operationalize your business around the most important KPIs for growth.

Thus, highlighting your strengths and areas that could be improved and suggesting the actions you need to take to implement the improvements you’ve identified will foster your company’s growth.

The industry experts at Numberly will help aspiring SaaS companies with strategic and operational planning, create the most efficient budgeting tool and develop a step-by-step plan for moving towards your goal.

Schedule a consultation session as per your convenience and availability – and we can discuss the right budget system during the chat.