The metrics that really fuel startup growth are the metrics that add to a company’s ability to further grow.
For example, positive cash flow means more resources available to hire developers or invest in marketing. Better conversion rates mean more revenue from less advertising spend. Churning fewer users each month equates to higher recurring revenue.
Let’s take a look at 8 key metrics that, when managed well, can help sustainably drive startup growth.
8 Metrics Behind the Growth
1. Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR)
Recurring revenue is the amount of revenue you expect to earn each period (i.e. monthly or annual) from your existing customer base. Especially for SaaS companies running a subscription-based business model, tracking recurring revenue gives great insight into the stability of the business.
A critical driver for managing your company’s cash flow in a volatile world, recurring revenue adds reliability and predictability to your forecasts. 2. LTV (Lifetime Value)
LTV is a measure of how much a customer is worth to your business from when they first sign up to when they decide to stop paying for your service. LTV is useful for telling you how much you can afford to spend to profitably acquire a new customer.
Some venture-backed companies do initially pursue unprofitable growth companies under the pretense that reaching a critical mass of users will push the company to profitability.
If you’re not satisfied with your LTV, there are a few levers you can tweak. Experiment with changing your pricing structure or working to improve customer retention.
3. CAC (Customer Acquisition Cost)
As the name indicates—this is the measure of your average cost to acquire a new customer. It’s calculated by dividing your total marketing spend during the period in question by the number of new customers acquired during the same period.
CAC = Marketing Spend / New Users
CAC is often used in conjunction with LTV to make sure you’re not spending more to acquire a customer than they will return to you over the duration of them being a user of your product or service.
4. Month-over-Month (MoM) Growth
When shown in absolutes, month-over-month growth is simply the number of new customers acquired each month, often reflected linearly: i.e. 500 new customers per month.
But a compound MoM rate shows the growth per month in %. Imagine that you’re growing your user base by 25% each month. While it seems slow at the beginning, maintaining this growth rate as the number of customers grows will result in exponential growth over time.
Closely monitoring your growth rate will help you make sure you’re growing fast enough to meet your goals. If not, consider making adjustments to acquire new customers faster by looking at increasing your conversion rate. However,, reducing churn of your existing users tends to drive better results over time than increasing marketing spend to acquire new users.
It’s natural for companies to lose a certain percentage of customers each month. For whatever reason, they may stop using your product or feel that it no longer fits their needs. This is churn.
Although some churn is inevitable, sustainable growth means reducing churn as much as possible. Make sure your customers feel like they’re getting a great value from your product or service.
6. Conversions (i.e. Trial to Paid / Free to Paid)
Many subscription-based products give potential customers free trials. The amount of these trial users converting to paid customers tells you a few things about your business.
Mainly, it lets you know whether or not customers believe the value received from your company is in line with what you’re charging.
7. Cash Flow
Cash flow is a great indicator of business health. Essentially, it reflects the net inflow of cash to the company bank account. Cash flow is not the same as profitability or revenue, so be careful with interpreting these two metrics as the same.
Healthy cash flow usually indicates that you’re growing your customer base while keeping your expenses and capital investments low. It also gives you a bit of flexibility to fund further growth through hiring additional developers, automating manual systems to serve more people, or to drive more customers through higher marketing spend.
8. Cost of Goods Sold (COGS)
Managing your costs well is a critical ingredient to healthy and profitable growth, for services, SaaS businesses, and manufacturing operations alike. Your COGS can affect both your product pricing and your cash flow.
A sustainable business must constantly monitor and control COGS. If COGS gets out of hand, you’re essentially shipping dollar bills out the door with every sale.
An Accounting Partner that Moves at Startup Speed
A growing startup can have a lot of moving parts. Tracking key KPIs is crucial to managing growth and profitability. These 8 metrics cover the spectrum of your startup’s scope – from generating customers and revenue to controlling profitability and cash flow.
A reporting system to generate KPIs reflecting what’s happening in critical business areas makes steering such a complex operation possible.
Partnering with an expert accounting firm that understands how quickly startups move is essential. Give us at Founder’s CPA a call. We get the startup industry and make managing your business based on data and information easier.