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5 metrics that a startup must consider

5 metrics that a startup must consider

17 Sep 2019

The word “metrics” is a kind of a nightmare almost to all beginning entrepreneurs. Lots of formula, constantly changing and vague dashboards, a lot of numbers and figures — it is easy to freak out. However, at the same time, if you do not count several metrics and performances, it is almost impossible to understand what is going on in your business.

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Metrics for companies in different industries are quite different. However, there is a set of basic universal indicators that should be considered by almost any company. We will deal with them today.

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MRR

Revenue and MRR (monthly recurring revenue)

Everyone counts their income, but it is important to mention, that it is the most important metric to the startups — this metric is a starting counting point to the dozens or even hundreds of other metrics and multipliers (even to valuation of the whole company). In fact, MMR is a regular repeatable monthly revenue. It has to be counted in any business, that offers a product following a model of subscription; for instance, on its basis are measured average purchase size, customer churn and growth, and other metrics.

The standard calculating model — Σ of all user subscription incomes for the current month.

The alternative calculating model = Average purchase size * quantity of the paying users.

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Burn rate
 

Burn rate

Burn rate is a speed of “burning” companies money on the bank account. This metric is crucial, as it gives understanding of how long will the company be able to function with the current amount of money available and when to start attracting the next round (hint — at least 6 months before the money runs out). It is counted by different methods, the basic one is by deducting money on the account at the beginning and at the end of the month.

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CAC

CAC (customer acquisition cost)

CAC indicates the sum which a company spends on attract a paying customer. It is counted as:

CAC = TAC (total acquisition cost — general expenses on attracting the customers/new gained customers throughout the current period.

The beginning entrepreneurs are usually diminishing CAC because of the three widespread fallacies:

  1. First of all, I want to pay your attention, that it is more important to count the cost of acquisition of a paying customer. Then the comparison of the metric with LTV (which will be explained below) will give more useful data.

  2. Secondly, it is not entirely correct to consider CAC as a quotient of the total costs of attracting all new customers in general for the period. Some of the customers come organically, and it has to be removed from the calculation in order to make it more informative — so CAC should be counted as a quotient of the total costs of attracting new customers who came from paid channels. It is important to count by this method because it allows you to evaluate whether the company has found effective channels for attracting customers in order to pour funds into them and get the maximum “spin-off”.

  3. Thirdly, in your countings you have to include all the expenses relating customers acquisition down to the loss of the given discounts, referral programs and client discounts.

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LTV

LTV (lifetime value)

LTV reflects the profit received by the company from one customer for the entire time working with him, and is counted as follows:

LTV = CMC (contribution margin from customer) * ALC (average lifespan of customer — average continuity of collaboration with a customer).

CMC = R (revenue from customer — VCC (variable costs associated with customer).

R = average order value * number of orders.

VCC includes sales costs, administrative and any other operational costs associated with customer service.

ALC = 1/monthly Churn.

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Churn

Churn

Churn shows the percentage of customers who stop buying a company’s product. It can be considered both in quantitative terms (in the number of users) and in lost revenue. Also, when counting, it is important to distinguish between Gross churn and Net churn.

Gchurn = lost MRR (the difference between last month’s MRR and this month’s MRR from old buyers, excluding new ones) / MRR at the beginning of the month.

Nchurn = (lost MRR — MRR from upsells (such as paying a package of services in excess of the tariff plan) to the existing customers) / MRR at the beginning of the month.

I hope that this article has shed light on the terrifying world of metrics. I want to cheer you up — it is only the tip of an iceberg, a universal minimum. Furthermore, to the company effectiveness evaluation, one adds narrow industrial metrics, which we will discuss in our next articles.

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17 Sep 2019

 

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