Startups are modern day business which allows you to take up higher risks, experiment and build disruptive businesses very quickly. Being successful requires a lot of discipline and there are certain startup metrics that every entrepreneur should track and measure.
Revenue is recognized when the service is actually provided or ratable over the life of the subscription agreement. How and when revenue is recognized is governed by GAAP.
Investors more highly value companies where the majority of total revenue comes from product revenue (vs. from services). Why? Product revenue is the what you generate from the sale of the software or product itself, is recurring, has higher margins, and is scalable.
ARR (annual recurring revenue)
is a measure of revenue components that are recurring in nature. It should exclude one-time (non-recurring) fees and professional service fees.
ARR per customer
Is this flat or growing? If you are upselling or cross-selling your customers, then it should be growing, which is a positive indicator for a healthy business.
MRR (monthly recurring revenue): Often, people will multiply one month’s all-in bookings by 12 to get to ARR. Common mistakes with this method include: (1) counting non-recurring fees such as hardware, setup, installation, consulting etc and (2) counting bookings
While top-line bookings growth is important, entrepreneur must understand how profitable that revenue stream is. Gross profit provides that measure.
In general, all costs associated with the manufacturing, delivery, and support of a product/service should be included while calculating gross profits.
#Life Time Value (LTV)
Lifetime value is the present value of the future net profit from the customer over the duration of the subscription/agreement. It helps determine the long-term value of the customer and how much net value you generate per customer after accounting for customer acquisition costs (CAC).
A common mistake is to estimate the LTV as a present value of revenue or even gross margin of the customer instead of calculating it as net profit of the customer over the life of the relationship.
#Gross Merchandise Value (GMV)
GMV is the total sales dollar volume of merchandise transacting through the marketplace in a specific period. It’s the real top line, what the consumer side of the marketplace is spending. It is a useful measure of the size of the marketplace and can be useful as a “current run rate” measure based on annualizing the most recent month or quarter.
Total Revenue is the portion of GMV that the marketplace “takes”. Revenue consists of the various fees that the marketplace gets for providing its services; most typically these are transaction fees based on GMV successfully transacted on the marketplace, but can also include ad revenue, sponsorships, etc. These fees are usually a fraction of GMV.
#Customer Acquisition Cost (CAC)
Customer acquisition cost or CAC should be the full cost of acquiring users, stated on a per user basis.
One common problem with CAC metrics is failing to include all the costs incurred in user acquisition such as referral fees, credits, or discounts. Another common problem is to calculate CAC as a “blended” cost (including users acquired organically) rather than isolating users acquired through “paid” marketing. While blended CAC [total acquisition cost / total new customers acquired across all channels] isn’t wrong, it doesn’t inform how well your paid campaigns are working and whether they’re profitable.
This is why investors consider paid CAC [total acquisition cost/ new customers acquired through paid marketing] to be more important than blended CAC in evaluating the viability of a business/ it informs whether a company can scale up its user acquisition budget profitably.
Burn rate is the rate at which cash is decreasing. Especially in early stage startups, it’s important to know and monitor burn rate as companies fail when they are running out of cash and don’t have enough time left to raise funds or reduce expenses. As a reminder, here’s a simple calculation:
Monthly cash burn = cash balance at the beginning of the year minus cash balance end of the year / 12
It’s also important to measure net burn vs. gross burn:
Net burn [revenues (including all incoming cash you have a high probability of receiving) – gross burn] is the true measure of amount of cash your company is burning every month.
Gross burn on the other hand only looks at your monthly expenses + any other cash outlays.
Investors tend to focus on net burn to understand how long the money you have left in the bank will last for you to run the company. They will also take into account the rate at which your revenues and expenses grow as monthly burn may not be a constant number.
Different companies have almost unlimited definitions for what “active” means. Some charts don’t even define what that activity is, while others include inadvertent activity such as having a high proportion of first-time users or accidental one-time users.
#Month-on-month (MoM) growth
Often this is measured as the simple average of monthly growth rates. But investors often prefer to measure it as CMGR (Compounded Monthly Growth Rate) since CMGR measures the periodic growth, especially for a marketplace.
Using CMGR [CMGR = (Latest Month/ First Month)^(1/# of Months) -1] also helps you benchmark growth rates with other companies. This would otherwise be difficult to compare due to volatility and other factors. The CMGR will be smaller than the simple average in a growing business.
There are all kinds of churn — dollar churn, customer churn, net dollar churn — and there are varying definitions for how churn is measured. For example, some companies measure it on a revenue basis annually, which blends upsells with churn.
Investors look at it the following way: Monthly unit churn = lost customers/prior month total
Retention by cohort
Month 1 = 100% of installed base
Latest Month = % of original installed base that are still transacting
It is also important to differentiate between gross churn and net revenue chuRN
Gross churn: MRR lost in a given month/MRR at the beginning of the month.
Net churn: (MRR lost minus MRR from upsells) in a given month/MRR at the beginning of the month.The difference between the two is significant. Gross churn estimates the actual loss to the business, while net revenue churn understates the losses (as it blends upsells with absolute churn).
A lot of entrepreneurs get obsessed with customer acquisition that they forget about customer retention. If you don’t focus on existing customers, they may get frustrated and leave. For many, customer acquisition cost can be high multiples than the cost to keep a current customer. The cost to Upsell/Cross sell could also be a lot higher to new customers vs existing customers.
So who exactly should you focus on? There are three kinds of customers you need to think about:
Current – what can you do to make these customers more satisfied? If you don’t know, simply ask. People love to talk and give their opinion, so you won’t be bothering them.
Inactive – customers who’ve stopped using the product or slowed their use of it should be asked why. Again, they are a great source you should take advantage of to help you improve your product and customer service.
- 16 Startup Metrics – Andreessen Horowitz
- Dave McClure’s metrics framework for your business and customers, and how to apply it to your product and marketing efforts.
Acquisition, Activation, Retention, Referral, and Revenue (AARRR!)