“What gets measured gets improved.” That’s why, in this article created by Valentina Terranova from the accelerator Embarca, you’ll have the opportunity to explore the topic of “Metrics for Startups,” learn about the key metrics to track based on your business model, and discover the stages of a sales funnel that your potential customers go through. If you don’t know what your business’s key metric is, you’re in the right place to start figuring it out.
Lean Startup
“Lean Startup is basically the ABC of startups and how technology is built”
Without getting into too much detail, the idea is to share the logic behind this methodology, whose goal is to quickly validate an idea. Its pillars are:
- Create a hypothesis. Make an assumption about a problem and possible solutions, as well as the behavior of the potential user.
- Build an MVP to validate it.
- Measure the results. Focus on real results and avoid vanity metrics.
- Learn. At this stage, you should pivot or explore your findings further.
- Build again. Either with something new or by building on what’s already in place.
The faster and cheaper the experiment, the better. Fail fast and fail cheaply.
Sales Funnel
Dave McClure, founder of 500 startups, created a funnel called “Pirate Metrics for Startup Growth.” It helps us understand the journey users take before completing the desired task, which is 100% tied to your business model and/or your north star metric.
It’s important to understand the funnel, because different things are measured at each stage, helping you determine whether your startup is on the right track.
The steps in the framework proposed by McClure are:
- Acquisition.
- Activation.
- Retention.
- Referral.
- Revenue.
Acquisition
Some relevant questions to answer are:
- Who are your users?
- Which channels are they coming from?
- Which channel generates the most traffic?
- Which channel performs best?
- Which channel has the lowest acquisition cost?
Relevant metrics:
- CAC (Customer Acquisition Cost)
- Conversion rate (Rate of users who converted into customers)
How do you calculate your CAC?
If you’re a startup, here’s how to calculate your CAC.
Activation
Once you’ve acquired a user, you’ll want them to start using your product and discover its value as quickly as possible.
Some relevant questions to answer are:
- How good is the user’s first experience?
- At what point does the user have their “Aha moment”?
Relevant metrics in B2C:
- MAU - Monthly Active Users
- DAU - Daily Active Users
- WAU - Weekly Active Users
- Number of transactions
Relevant metrics in B2B:
- Onboarding process
- Number of active customers
At the end of the day, an activated customer is one who keeps coming back to use your product.
Retention
One of the most important metrics, and one that will help you focus on non-vanity metrics.
Relevant metrics:
- % of returning users
- Number of users and/or customers
- Churn
- LTV (Lifetime Value)
How to calculate churn and lifetime value at a startup
Before learning how to calculate them, it’s important to understand what each concept means. Here’s an overview:
- What is churn? A metric that shows how many users stopped paying for your product. In other words, the churn rate over a given period. Churn = Customers who left / customers at the start of the period
- What is lifetime value? The monetary value a customer brings you over their lifetime as a customer.
Referral
How do you turn your users into your best salespeople? You’ve already got your users to pay for your product; now it’s time to encourage them to recommend it.
Relevant metrics:
- % of customers who refer others
- # of referring customers
- Value per referred $
- NPS - Net Promoter Score
Revenue
The most important metric for almost every business model.
Relevant metrics:
- ARR - Annual Recurring Revenue
- MRR - Monthly Recurring Revenue
- Margin
- GMV - Gross Merchandise Value (Total transaction volume)
- Take Rate - % commission per transaction
- Ticket size - Average transaction size
Bonus
In addition to the metrics specific to some business models, here are a couple of metrics every startup should track, no matter what.
Burn Rate - What is the burn rate?
The amount of money spent each month.
Runway - What is the runway?
The amount of time a startup can survive based on how much money it has in the bank.
- The formula to calculate it is: Burn rate / amount of money in the bank = # of months before running out of money.
Metrics to Track by Business Model
Your business model is 100% tied to specific metrics; every institutional investor will expect you to know and master them. That’s why below we’ve listed the metrics expected for 6 common business models.
How do I know if my startup is growing at an attractive rate?
As a general guide, you can use the following growth rates. Note that these figures are not tied to any specific business model; however, almost any startup with numbers like these is likely to attract investors.
If your startup doesn’t have these numbers, that doesn’t mean it can’t attract investment. However, stronger numbers will always increase your chances of raising investment.
- Grow by more than 5% weekly
- Grow by more than 20% monthly
- Grow by more than 10X annually