2021 was a golden year for startups. Amidst efforts to recover from the COVID-19 lockdown, venture capital funding in startups picked up and then peaked.
However, since then startup funding has not quite done those numbers anymore.
In fact, Q4 2023 had the lowest VC funding rates in five years. What does this mean for startup leaders and the growth of their businesses?
It means you need to take a pragmatic approach to tracking your startup growth. And you can’t do this if you are not familiar with the most relevant metrics. This is what this article aims to help you achieve.
Below are some of the most important metrics for tracking your startup growth which you should start measuring now if you haven’t started yet.
1. Customer Acquisition Cost (CAC)
For tracking your startup growth, Customer Acquisition Cost (CAC) measures the average cost of acquiring each new customer. Cost, here, includes all expenses related to marketing, sales, advertising, promotions, onboarding, etc.
CAC is a crucial metric because it helps startups understand the efficiency of their customer acquisition efforts as well as how much they need to spend to bring in new business.
The aim is to keep the CAC as low as possible while delivering value. If CAC is too high relative to revenue generated from customers, the startup might start facing sustainability issues, which is not something you want, particularly in the early stages when cash flow is tight.
2. Churn Rate
Churn occurs when customers stop using your product or service, for any reason. This is what makes the churn rate a vital indicator of customer satisfaction and the quality of your offering. A high churn rate typically suggests issues with the product, service, or customer service.
For a subscription service, for instance, the churn rate can be calculated by considering the percentage of customers who cancel or fail to renew their subscription during a given period.
While the aim is to keep the churn rate as low as possible, having a zero churn rate is virtually impossible, no matter how good your product or service is. Therefore, calculating your churn rate should come with adequate analysis to understand why customers leave and whether you need to improve your offering in any way.
3 Monthly Recurring Revenue (MRR)
This metric is quite straightforward if you want to start tracking your startup growth efficiently. The MRR refers to the predictable revenue that a startup can expect to earn every month. It is primarily used by subscription-based businesses, which are assured of a more consistent flow of income from customers.
So, the MRR is calculated by multiplying the number of paying customers by the average revenue per user (ARPU). This provides a clear picture of financial health and growth trends. Consistent MRR growth is a sign of a healthy, scalable business model.
4. Customer Lifetime Value (CLTV)
Customer Lifetime Value (CLTV) is an estimate of the total revenue a business can expect from a single customer over the entire duration of their relationship. It is calculated by multiplying the average revenue per user (ARPU), gross margin, and average customer lifespan.
Understanding the average lifetime value of a customer shows you how much a customer is worth to your business over time and informs you how much you should aspire to spend to acquire new ones.
Imagine that your customer acquisition cost (CAC) is $200 but the average customer is only worth $150 throughout their lifetime using your product or service. Something must change, right?
5. Burn Rate
When startups raise money, it is tempting to spend the investment on frivolities that don’t appear so at first, while the original business object lags. In cases like this, looking at your burn rate can jolt you back to reality.
The burn rate is the reality at which a startup is spending its capital. It is a measure of negative cash flow, in simpler terms. The burn rate is typically calculated by dividing the amount of cash a startup has spent in a given period by the length of that period.
This tells you how long your current funding will last and whether you should start planning to raise additional capital. Always try to lower your burn rate, as a high burn rate can lead to a cash crunch and ultimately kill the business before profitability.
6. Cash Runway
The cash runway metric is similar to the burn rate, in that it estimates how long a startup can continue operating at its current burn rate before it runs out of cash. However, while the latter is measured in money, the cash runway is expressed in a unit of time, such as months.
To calculate your runway, simply divide your cash balance by your burn rate. Knowing your cash runway helps in strategic planning. It informs decisions on whether to cut costs, seek additional funding, or scale operations. A longer runway gives a startup more time to achieve key milestones.
7. Engagement Metrics
Many of the metrics explored for tracking your startup growth are financial and money-related metrics. But those are not the only indicators that matter. Measuring how your users/customers interact with your product and service can go a long way in understanding your growth as a business.
Examples of such metrics include:
- Active Users: Number of users interacting with the product over a given period.
- Session Duration: Average time a user spends on the platform.
- Retention Rate: Percentage of users who continue to use the product over time.
These metrics provide insights into customer behavior and can inform product development, marketing, and growth strategies. Good results on them point to high customer satisfaction, which can reduce your churn rate and increase revenue.
8. Conversion Rate
As a startup, you don’t just want to build a community of enthusiasts who are excited about your product. You want actual customers. This is where the conversion rate is useful. It measures the percentage of visitors who take a desired action, such as signing up for a service, making a purchase, or downloading an app.
It’s calculated by dividing the number of conversions by the total number of visitors or leads. Conversion rate is important because it helps startups understand the effectiveness of their marketing and sales efforts.
A higher conversion rate means more efficient use of marketing efforts. Improving conversion rates can significantly impact revenue without increasing traffic, making it a crucial metric for growth optimization.
9. Return on Investment
This is perhaps the most popular metric there is. ROI is the most common way to measure the efficiency of an investment by comparing the profit generated relative to its cost.
To calculate the ROI of an investment into a particular marketing or sales initiative, divide the net profit from the investment by the cost of the investment. ROI helps startups determine which initiatives are generating the highest returns and where they should focus their resources.
High ROI indicates that the startup is making wise investment choices, contributing to growth and profitability.
Leadership Beyond Numbers
Entrepreneurs and business leaders love talking numbers. It clarifies a lot of things and makes communication easy. But a huge chunk of what you’ll do as a business leader is strategy. Numbers only make sense when there is a strategy at work.
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