As your business evolves, so should the metrics you track. Early on in a startup, especially if you're bootstrapping, you may be concerned with only revenue and profits. But as your business grows, a deeper look at performance and financial metrics can help you spot potential pitfalls before they occur.
Here are some key metrics every startup should track:
1. Customer Acquisition Cost (CAC)
CAC measures -- you guessed it -- the cost of acquiring a new customer. The easiest way to calculate CAC is to pick a specific time period and then divide your cost of marketing and sales by the number of customers you gained. For example, if you spent $1,000 to get 20 customers, your CAC is $50.
Clearly, the lower your CAC the better, but how low depends on your business model and your industry. If you're in the prepared meal kits business, your CAC may be over $100 per person. If you're selling iPhone charger cables, it'll probably need to be in the pennies.
A rising CAC can be a sign of trouble, but not if you've introduced a new product or service with much higher margins. Like most metrics, CAC can't be evaluated in a vacuum; it should be evaluated in conjunction with a number of other metrics. Such as ...
2. Retention Rate
Also known as churn rate, retention rate evaluates the percentage of customers that stay with you and the percentage that leave over a given time period. (That's why it's particularly relevant for subscription business models.)
The formula can be a little complicated, but one way is to subtract the number of new customers from your total customers at the end of a given period, then divide that number by the number of customers you started the period with.
For example, if you started the month with 10 customers, gained five new ones, and lost two, the calculation is 13 (total customers at the end of the month) minus five (new customers) equals eight, divided by 10 equals .8, or 80 percent. That means your retention rate is 80 percent -- you kept 80 percent of your customers.
(Or, if you prefer, you can calculate churn rate in very simple terms: If you have 100 customers at the start of the month and at the end of the month have 97, that means your churn rate is three percent.)
The goal is to keep your retention rate as high as possible, or your churn rate as low as possible.
3. Customer Lifetime Revenue (CLR)
Also known as Customer Lifetime Value, this metric measures the revenue you receive from repeat customers. While it can be tough to predict CLR in the early stages of a business, once you have a reasonable data set you can start to make certain assumptions.
If yours is a subscription- or recurring-revenue model and you keep your average customer for 14 months, then that 14 months' revenue can be considered your CLR.
Why do you care? For one thing, knowing your CLR can help you determine how much you can afford in CAC: The greater the lifetime revenue of a customer, the more you can afford to spend to acquire that customer.
CLR can also help you evaluate the quality of your customer service; some customers will leave because they don't like your products or services, but many will leave because they feel your customer service is inadequate.
4. Return on Advertising Spending (ROAS)
Unless you can afford to do brand awareness marketing (which most startups cannot), then advertising spending is an investment -- one you expect to generate a return. ROAS calculates that return. The math is easy: Divide the sales generated by your advertising spending.
So if you spent $15,000 on advertising that resulted in $30,000 in sales, your ROAS is $2. You generated $2 for every $1 you spent.
But you need to take a closer look than that. It's easy to fall into the trap of marketing on a variety of channels at once -- but that makes it hard to evaluate which of those channels were effective. Start small. Figure out your audience. Then expand.
I left this one for last because the bottom line is everything. Before you hire more people, make sure your business is where you -- or your investors -- want it to be.
There are many ways to calculate margin, but generally speaking your revenue must exceed your cost of goods sold and your operating expenses (like rent, salaries, fixed costs, etc.)
If it doesn't, you have no business hiring more people.
That's not just the only way to stay in business -- that's a great way to build a resourceful, creative team, one that will help you grow your business.