Many startups collapse within their first or second year of operation because of not correctly tracking specific metrics or key performance indicators (KPIs). And without doing this, it becomes almost impossible to monitor whether tell what areas to improve. In addition, it’s a lot harder to attract potential investors to help provide additional financing vital for a company’s survival in the highly competitive marketplace.
Using different product performance, marketing, and financial metrics helps businesses determine the success of an activity or product and monitor changes. But due to the huge myriad of metrics, you don’t have the time to track all the KPIs, as this might be time-consuming and confusing. Luckily, this guide seeks to ease your troubles by outlining the five business metrics you must track in 2022 to guarantee the success of your startup.
1. Customer Acquisition Cost (CAC)
As a startup owner, you must first track the customer acquisition cost (CAC). This is crucial because one of your primary objectives as a startup is to acquire new clients, which boosts your company towards more significant growth. The customer acquisition cost thus refers to the sum of money you spend on marketing, sales, and other related expenses to get one customer. In addition, knowing your startup’s CAC helps you measure how efficient your marketing efforts are and whether there’s a way you can further improve.
Calculating the CAC is simple as you divide the sales and marketing costs by the number of new customers you’ve acquired within a particular duration. A lower CAC means your sales processes and conversion funnels must be optimized to achieve the desired marketing outcome. In contrast, a higher CAC shows you’re spending too much to acquire customers. In addition, the CAC usually directly affects your company’s gross profits; for instance, a higher CAC reduces the gross profit and vice versa.
2. Customer Retention Rate
The continued success of your business depends on how well you can retain your existing pool of clients. Because of this, you shouldn’t direct all your startup’s efforts to acquire new clients and keep hold of your current customers. After all, it’s cheaper to keep hold of existing clients than to develop new ones. Here’s where the customer retention rate (CRR) metrics come into play.
The CRR business metric refers to the number of customers who continue using your products or services over a certain duration. Moreover, knowing this KPI is crucial because it helps you know your business has reached a point where customers see that it offers them value. If this is the case, they’ll be more than willing to carry on spending their hard-earned money on your goods or services.
3. Churn Rate
While every startup owner dreams of keeping hold of every client they acquire, this isn’t always the case regardless of how exceptional the quality of your goods or services is. It’s for this reason that you need to measure the number of clients you’ve lost either due to loss of interest in your products or services. Moreover, knowing this will help you pinpoint the exact reason you’re losing clients and help you reduce the frequency of this happening in the future. You can even create a survey for your customers to fill to get an idea of why they’ve left.
Knowing the churn rate is critical as it helps you comfortably forecast the maximum size your company will eventually reach. Some of the reasons for a high churn rate include:
- Poor customer support
- Competitor providing clients with a feature you don’t have
- An issue with your platform
Once you’ve identified the issue, you should pass the information to the relevant departments from customer success, sales, and marketing. There’s no ideal period after which you should start measuring the churn rate as this differs from one business to another. For example, some startups measure this metric after 30 days, while others do this after 90 days.
4. Monthly Recurring Revenue
Another business metric you must track to help your startup plan is the monthly recurring revenue. This KPI essentially seeks to forecast the revenue your startup can generate by the end of each month. Consequently, you can use this business metric to predict the future monthly revenues, hence helping you know how to best use the company’s resources. The different things to consider when calculating the MRR include:
- Recurring add-ons
- Recurring plans
- Discounts given to cyclical charges
The formula to calculate your startup’s monthly recurring revenue is multiplying the total number of accounts in a specific month by the average revenue per client. With this figure in mind, you’ll be in a position to make your startup more sustainable and achieve greater success in the future.
5. Customer Lifetime Value (CLV)
This KPI measures how much revenue one customer can generate your startup over their lifetime when they’ll be doing business with you. Therefore, you should approximate the duration a customer will continue doing business with you. Tracking the customer lifetime value is essential because it’s part of the customer experience.
The purpose of knowing the customer lifetime value is to get an idea of how much money is spent on acquiring one client. And with this cost in mind, you’ll do everything possible to ensure your client continues doing business with you for a prolonged period rather than making just a single purchase. This is crucial considering you’ll spend considerably less on maintaining current clients than getting new ones.
To calculate the customer lifetime value, you must first calculate the lifetime value is obtained by multiplying three metrics, the number of transactions, average value of the sale, and retention period. Consequently, divide the lifetime value by the profit margin to get the customer lifetime value.
Running a successful startup means tracking all the relevant business metrics or KPIs as these shed light on how the company is progressing towards achieving its set goals. And to save you the hassle of being distracted by unnecessary business metrics, this guide has outlined the most important KPs you need to analyze. Using these metrics, you get to focus on what matters, thus better steering your business towards reaching its set goals and objectives.