Revenue is an important metric for every company. But can focusing on revenue actually get you in trouble?
For many startups, the amount of revenue you're bringing in impacts your runway and ability to keep the business alive. It can also impact your next funding round. Depending on which stage you're at, revenue is crucial when reporting to investors. However, in early-stage companies, I believe that product market fit is more critical for success.
In the early stages of my startup Leverage--a platform for entrepreneurs and small business owners to outsource any type of marketing effort--our biggest mistake was focusing too much on revenue.
We were seeing revenue increase month-over-month, so we assumed that things were working. Other areas, like product-market fit or the delivery of our service, became a second priority because sales were increasing.
Here's the story of how my startup almost failed--and what every entrepreneur should think about in terms of their success metrics.
How I broke my startup
At Leverage, we used to celebrate things like:
- Growing 10 percent month-over-month
- $1 million in revenue in our first year
- Over 150 team members in our first year
We were celebrating these milestones because they are metrics that impress other people. Doesn't revenue and team size go in every press release? Obviously, these are great numbers to have, but they actually "look" a lot better than they are for your business.
In reality, these numbers were hiding a much bigger issue--premature scaling.
What I'd do differently: retention vs. revenue
By celebrating our revenue, we were merely celebrating our marketing efforts and not the quality of our service. We had 10 percent growth every month, but we soon discovered that it was broken down between:
- A 20 percent increase in new clients each month
- A 10 percent churn rate
In an unfortunate turn of events, we ran into some issues with our marketing team and had to turn off all marketing efforts for a period of time. As you can imagine, when this happened we lost that steady 20 percent increase while being left with a broken company that was losing 10 percent of its clients month-over-month. The reality became clear: our 20 percent growth was masking the real problem, which was that our product was not as great as we thought it was and we were losing 10 percent of our clients every month as a result.
We should have been paying attention to the metrics that showed the quality of our service. In our case, those metrics were retention, churn, and customer success. When you look at the numbers, we were heavily reliant on our marketing engine. We were good at marketing a product, but not very good at delivering.
4 metrics you should measure at an early stage:
- Quality of your product (this can usually be measured by Net Promoter Score)
- Lifetime Value (LTV)
Most importantly, you have to think about the metric that helps you understand the quality of your service or product, and make sure it is improving or staying at a consistently high level. If you're an e-commerce company, you should pay attention to is the percentage of shipments returned. If you have a lot of returns, that is a clear indicator that there's something wrong with your product. If you're an app, it could be engagement or screen time.
Revenue is important, but there are other metrics that matter first.
If your retention and churn rates are weak, I'd suggest turning down your marketing efforts and focusing on increasing the lifetime value (LTV) of your customer. Once LTV is up, you can increase your marketing efforts, and thus, continue to increase your revenue at a steady (and sustainable) rate.
After resolving issues with our quality of service, we've been able to do the same amount in revenue with half the number of clients. This set us up for scaling (that's also one word that impresses other people). Now that we have a solid service we can stand by, we've been able to increase the average revenue per client month-over-month and start implementing a basic marketing funnel to bring in new leads.
In summary, is revenue a vanity metric? The punchline is yes and no.
It matters more depending on which stage you're at in your company. It will always be important to look at, but only as long as it doesn't cause you to lose focus on your product and retention rates.