When you run a startup, you need to know the foundational metrics every business should care about. In a stage where every decision matters, focusing on the right priorities can lead to rapid growth and excited investors just as focusing on the wrong priority can lead to frustration and failure.
However, identifying those foundational metrics can be difficult. Too many guides list upwards of 20 potential key performance indicators that may or may not be relevant to startup businesses. So let’s keep it simple, focusing on the immediate impact with these five metrics relevant to every startup from the moment they begin their operations.
As its name suggests, customer acquisition cost (CAC) is the total budget you need to spend to acquire the average new customer. It’s a key growth metric because your customers are the revenue lifeblood of your startup. The lower it gets, the more sustainable your efforts to grow your customer base become.
Most startups have a relatively high CAC to begin, thanks to the amount of money they have to spend on brand awareness. The key to this metric is a positive trend, in which your CAC slowly begins to sink for each period in which you measure it.
You can calculate your CAC by taking your total marketing and sales spend over the last quarter, then dividing that cost by the number of customers gained during the same quarter. For example, if you spend $10,000 on marketing and sales-related costs in Q1, and gain 50 new customers as a result, your CAC is $10,000/50 = $200. Costs should include both direct customer acquisition tactics, like ad campaigns, and indirect sales-related costs, like your CRM platform or the salaries of the sales team.
Churn and retention rate are closely related. For subscription-based businesses, churn calculates exactly what percentage of subscribers leave your platform every month. Meanwhile, retention matters regardless of the business, and measures what percentage of customers or subscribers like your product enough to come back to it.
Calculate your monthly churn by dividing the number of customers or subscribers lost during a given month by the total number of subscribers you had at the beginning of that month. For example, if you started the month of January with 500 subscribers but lost 50 of them by January 31, your churn that month was 50/500 = 0.1 or 10%.
When calculating your retention rate, pick a time period, then look at how many customers already in your database from a previous period made a new purchase. Now, divide that number by your total customers at the beginning of the period. For example, if you started Q1 with 500 customers and 100 of them were returning customers, your retention rate for Q1 is 100/500 = 0.20 or 20%.
Monthly recurring revenue (MRR) is a projection metric that helps you understand how much revenue you can anticipate on a monthly basis. It’s key not only to help you plan future budgets but also to show potential investors and other stakeholders the sustainability of your revenue flow. MRR is especially relevant for subscription-based businesses such as SaaS products which expect to keep customers month-to-month, but even non-subscription bsaed businesses may have some contracts that are recurring or continue for multiple months.
There are two basic ways to project your MRR:
You can also use more complex calculations for a more accurate MRR forecast. In some cases, like customers with yearly contracts, you might need to expand this metric to yearly recurring revenue instead of the typical monthly period.
Keeping track of how your business spends money is just as important as understanding how you gain revenue. Your burn rate indicates how fast the business is spending money. It helps you determine how far your revenue and any other sources of cash can get you in running and growing your business.
Investors are particularly interested in burn rate because it can also tell them how wisely you will spend their investment. Burning through cash and revenue can be a red flag, whereas judicious spending of that same investment while still steadily growing the business is generally a positive sign. It also helps you uncover unimportant or unexpected expenses that your business might be able to do without.
Calculating your burn rate is simple. Take the total amount of cash available at the beginning of the month, and subtract the total amount of cash available at the end of the month. You can also use a moving average of the last three months to determine burn rate trends in a positive or negative direction.
Finally, cash runway can help you understand how much longer your business has before it runs out of money, should no other revenue enter the equation. It takes the concept of your burn rate, and applies it in a forward-looking sense to better predict your startup’s financial future and help you make strategic and budgetary decisions accordingly.
You’ll need two variables for a reliable cash runway projection: your cash balance and your monthly rate. The cash balance is simply the amount of liquid cash your business has available to spend. Your monthly rate describes how many expenses your business has during the average month.
Using these variables, the formula for cash runway is cash balance / monthly rate. For example, if you have $100,000 in liquid funds for your startup and need about $2,000 monthly to keep it running, your cash runway is $100,000 / $2,000 = 50 months. Your cash runway shortens, of course, if major investments (like new hires) increase costs in a given month or across every month.
Understanding which metrics to track is only the beginning. An understanding of these five foundational startup metrics can help you focus your efforts, but you still can’t walk the growth path on your own.
DigitalOcean’s simple, cost-effective cloud computing solutions can help to power your startup, and enable you to focus on growing your business. Learn how customers are using DigitalOcean to scale their businesses, then dive in yourself to start building towards long-term, sustainable success.
January 11, 2023•3 min read
December 14, 2022•3 min read
December 8, 2022•3 min read