Business metrics measure startup performance, providing valuable insight to founders, investors, employees, and even customers. As a startup founder, you will want to learn to measure certain aspects of your business in order to track your performance.
There are a number of different metrics to consider, and all have their place. Here are a few to become familiar with.
Churn rate is a measure of how many customers you’re losing. It is an annual percentage of how many customers stop using your product, or cancel their subscription within a given time frame, typically looked at monthly or yearly. While no one wants to lose customers, a certain amount of churn is to be expected and even planned for.
There is no set “acceptable” churn rate, however many experts place it around 5%–7% annually. A lower rate is good to see, while a higher rate may be an indication that something other than normal attrition is driving customers away.
Burn rate refers to how much money you are ‘burning’ through on a regular basis, specifically with regard to what is in excess of your income. This is a common metric used frequently in reference to fundraising, as your investors will want to know what you’re spending their money on, and how quickly you’re going through it. It’s also an indication of how quickly you’ll spend yourself into trouble.
Knowing your burn rate is key towards managing expenses, expectations, and cash flow. More than a few startups have fizzled out due to poor management of capital.
Also known as “Gross Margin”, this metric gives specific insight on the financial performance of your startup in plain numbers. Specifically, gross profit is a measure of total revenue minus the total cost of producing your products.
It is not the final say on profitability as it only looks at variable costs, i.e. costs that fluctuate based on your output such as materials or labor. It does not look at fixed costs, (expenses that are present, regardless of output) such as office rent, or insurance.
Gross profit is intended to measure the efficiency with which your startup is able to produce its product, not a measure of overall profitability.
Knowing how much money your startup is bringing in on a regular basis is vital; it can help you predict what the future of your company will look like. If you notice one particularly active user makes purchases every month on the 15th, then you know that over time, you can count on that particular revenue.
Monthly recurring revenue (MRR) is a staple metric of the SaaS industry, and is gaining more traction in other sectors as well. Subscription-based services, whether they are product or service-driven, rely heavily on establishing solid MRR.
Not All Metrics are Created Equal
Keeping track of data is an exceptional way to check in on the health and wellbeing of your startup. However, it is also important to remember that not all analytics are created equal, and not all will tell the whole story.
Just as “gross profit” does not reveal an accurate portrayal of your startup’s profitability, churn and burn rates can also be indicators, rather than the final word. Metrics of all kinds have their place, and in the modern business landscape we can now look at, track, and analyse more than ever before.
The challenge lies in learning when to take the data at its word, and when to not become tethered to the numbers. It is important to remember that data is often just one chapter, and your startup is a whole book unto itself.