For any business, understanding revenue, expenses, and profitability are crucial. However, there are more nuanced metrics that companies should track.
Early-stage startups, especially, should measure themselves against certain benchmarks to ensure they are progressing in a positive direction. Many times, founders will focus only on one or two statistics and lose sight of other critical parts of the business. As a result, they discover major problems in their operating or financial model after it’s too late to pivot.
Below, we discuss the 8 most important metrics for early-stage startups to track regularly:
- Total Addressable Market
- Cash Burn
- Customer Acquisition Cost
- Retention Rate
- Lifetime Value
- Viral Coefficient
Each of these can be calculated in a slightly different way, depending on the nature of the business. Startup leaders must ensure their teams understand exactly what to measure, what the goals are, and what levers to pull to be successful.
1. Total Addressable Market
Total Addressable Market (TAM) is a measure of how much revenue opportunity exists for a particular product or service. Calculating TAM is important when going into fundraising conversations, as investors want to estimate their potential return on invested capital.
TAM can change over time due to disruptive competitor offerings, new technologies, or government regulation. For this reason, it can be valuable for startups to revisit TAM often.
Anyone with a basic understanding of business knows that monitoring revenue is essential. In the startup world, there are several helpful ways to measure revenue.
Leaders can calculate recurring revenue on a monthly, quarterly, or annual basis. They can track revenue per customer or dig into deferred revenues to ensure cash flow is stable. The most important takeaway here is to fit revenue calculations to fit the underlying business model.
Margin is most commonly calculated by subtracting cost of goods sold (COGS) and operating expenses from top-line revenue. If your startup’s margin is not positive, you either have to increase revenues or decrease costs. Otherwise, the long-term sustainability of your business is in jeopardy.
4. Cash Burn Rate
The Cash Burn Rate (CBR) is a reflection of how quickly a startup uses its cash and cash reserves. In other words, it shows how much money a company loses (AKA “negative cash flow”) over a defined interval.
The burn rate is crucial for early-stage businesses that have yet to turn a cash flow corner. It helps founders understand how much time they have left before they run out of capital.
5. Customer Acquisition Cost
Customer Acquisition Cost (CAC) measures how much money a startup has to spend to win a new paying customer. Businesses typically calculate CAC using the formula below:
(marketing + sales spend) / new customers gained over specified period
Generally, the lower CAC is, the better. For early-stage startups, keeping track of CAC is important because it helps founders quickly assess whether they can attract new buyers easily enough to justify the cost of delivering a product or service.
6. Retention Rate
Retention Rate calculates the proportion of customers that stay with a business over time. Determining retention rate depends on the startup’s business model. However, one broad way to think about the metric is with the following formula:
(total customers - new customers) / customers at the start of the measurement period
Calculating churn may also make sense for startups to measure how frequently the company loses customers. By increasing retention and minimizing churn, startups can boost the lifetime value of their accounts, which is the next metric!
7. Lifetime Value
Lifetime value tells leaders how much value they can expect to earn from a customer or account throughout the entirety of a relationship. “Value” can take on different meanings. Some startups prefer to look at how much revenue a customer generates, while others prefer profitability.
Understanding lifetime value can inform decisions around how much a startup can spend to acquire new customers (re: CAC). Additionally, lifetime value may be an indirect indicator of how much customers value your product. A low lifetime value relative to the product’s price might mean customers don’t think they are getting enough for what they pay.
8. Viral Coefficient
The Viral Coefficient is used to measure a startup’s organic growth. It captures how excited and satisfied users are by quantifying their willingness to share a product or service with others.
Startups that want to calculate the viral coefficient can do so by taking an initial pool of customers, counting how many invitations they send to others, and tracking what percentage of those invitations convert into new customers.
Overall, there are many other ways to measure the financial and operational health of a young startup. However, these eight are essential for founders to understand. Customize them to your unique model and make sure your teams have everything they need to track them successfully!