When running, building, or even scaling your startup, it’s important to understand metrics which drive and guide your strategies. Tracking the right numbers don’t only help you sleep at night, but they can also help you make sure you’re profitable, acquiring customers at a reasonable price (cost per acquisition or customer acquisition cost), and push for a long-term growth strategy. Today, we’ll run through some of the most essential metrics, five to be exact, that your startup should measure to maintain its growth.
What is MRR? Well, it represents the predictable revenue your startup can expect to generate on a month to month basis from subscriptions, invoices, etc. It helps gauge overall growth and serves as one of the more consistent metrics for financial planning.
Formula:
Why it matters:
If you’re a subscription-based business, then MRR is one of the most important metrics you’ll have to track overall. By tracking it, you can identify trends, forecast future revenues, and spot any dips in customer retention. When you see a consistent up-trend of MRR, it’s usually a sign of healthy customer satisfaction and a scalable business model..
What is the Burn Rate? It’s how you reference that you’re burning cash… Not exactly, but it’s a reference or a point of how quickly your startup is using its cash reserves. It shows whether or not you’re operating efficiently or just burning through cash way too fast. As we all know, cash flow compared to burn rate is something investors tend to look at.
Formula:
Why it matters:
When you have a clear understanding of burn rate you can then manage your runway – which is the amount of time your startup has before it runs out of money. If your burn rate in comparison to your cash reserves is too high, you’ll have to look to the mercy of investors.
CAC measures the cost of acquiring a paying customer. Please remember that they aren’t customers until they pay you. It includes the total sales and marketing expenses needed to attract and convert new customers.
Formula:
Why it matters:
Understanding and improving your CAC is essential to balancing your marketing budget as well as any other budget you have to manage. If the CAC is too high or higher to the customer’s lifetime value (LTV), your startup will end up losing money on every customer. Regularly measuring CAC will allow you to fine-tune your marketing strategies and maximize the return on demand generation.
LTV shows the total profit your company will generate from a customer over their entire relationship with you and your business.
Formula:
Why it matters:
LTV can give you an idea of the long-term value a customer brings to your business. When you compare LTV to CAC, it’ll give you a better understanding as to if you need to better your customer acquisition efforts or keep em’ the same. A healthy LTV to CAC ratio is usually 3:1, meaning you’d earn $3 from every customer for every $1 you’ve spent attempting to close them.
Churn rates are the percentages of customers who stop subscribing to your product or service within a certain period of time. It’s a key metric for understanding how well you’ve retained customers and continue to retain them.
Formula:
(Where Lost MRR is the difference between last month's MRR and this month's MRR from existing customers)
Why it matters:
A high churn rate is no bueno. It signals customer dissatisfaction with your product or service. Since acquiring new customers tends to be more expensive than retaining existing ones, minimize your churn as it can be the make or break for your business.
By measuring MRR, Burn Rate, CAC, LTC, and Churn, you can get a better understanding of your startup’s financial health and growth potential. By focusing on improving these numbers, you can make better informed decisions, attract investors (unless you’re an AI company, then it all seems to not matter), and set your business up for long-term success.