The business world is driven by data – budgets, projections, revenues, and other financial metrics. As your startup grows, so too should your attention to those numbers. Of course, managing a fast growing startup means your time will become limited, so how can you efficiently determine which data is most important to evaluate, as well as how to assess it and what to do once you have it?
When approached and used appropriately, business metrics can help you gain a significantly better understanding of your organization and its operations, and ultimately, help you position it for future industry success.
When to Use Metrics
No matter the size of your company or how long it has been in operation, metrics can and should be a central consideration in your daily business routine. The most successful CEOs make it a point to become intimately familiar with every facet of their company, and few other tools allow you to measure and evaluate your company’s past (and future) as effectively as metrics do. Regardless of your industry or number of staff members, utilizing metrics is a critical component of understanding your business and optimizing your operations. Why is that? Metrics are essentially indicators of your company’s health boiled down to a few numbers. Almost every operational function within the company can be distilled to a few key performance indicators that allow for an objective measure of whether you are doing a good or bad job. This also serves as a benchmarking tool – it is much easier to do a better job in the future if you know how you have done historically.
Which Metrics to Use
Once you make the decision to incorporate performance data, where do you begin? Which numbers should you focus on first? The six metrics below are critical to monitor as you track the growth of your business. They are also going to be the first pieces of data that any savvy potential investor will request.
- Runway. Runway refers to how long the funding currently available to you will allow you stay in business. If you were to receive no additional financial support or revenue, how many months could you remain in business? If you are consistently profitable, the answer is indefinitely. If you lose money on average, it is the amount of time you have to become profitable or to raise more capital before you go out of business.
- Leads and lead conversion rate. Your leads are your potential customers. How many potential customers inquire per month, and what percentage of them become customers (i.e. convert)? This data illustrates how effective you are at turning interest into a sale. Your conversion rate is a function of how effective your sales and marketing processes are, as well as your price point relative to the value you deliver.
- Customer acquisition costs. How much does it cost your company to acquire a single customer? Consider your advertising fees, your direct labor (i.e. what you pay your marketing and sales teams), and all other costs you must expend before the customer purchases your service or product. The less expensive your cost per new customer, the better. The best businesses see their customer acquisition costs decrease over time as they improve their brand, improve their sales process, and – ideally – generate some sort of network effect that makes it increasingly easy to attract each new customer.
- Gross profit. Assess both your gross profit margin ratio (over time) and your gross profit per customer. Your gross profit margin ratio, or (Revenue – Cost of Goods Sold) / (Revenue), should have a value as close to 1.00 as possible. The higher margin each sale is, the better. The gross margins of software products, for instance, should typically be north of 75% and the best business models have even higher rates. While it is simple to fixate on revenue, you depend on profit margins in order to pay your company’s operating expenses. The higher your gross profit per customer, the easier it is to build a profitable business, assuming you aren’t pricing yourself out of the market. Higher margin businesses are typically valued at premium because they offer the ability to adjust prices down and still be profitable if forced to do so, whether by competitive pressures or yielding a higher return on invested capital.
- Churn. Churn rate is a measure of your ability to retain customers. As a whole, it is easier to sell to a current customer than it is to acquire a new one, and an existing customer has a much lower acquisition cost (zero). When your retention rate is low, your churn rate is high, meaning you are constantly replenishing your pool of customers and spending more in the process. If you are doing a good job, your existing customers will keep purchasing from you. Churn rates can be a strong indicator of how good your product or service is, as well as how effective you are at following up with your existing customer base and maintaining and developing those relationships. What constitutes a good or bad churn rate is industry-specific—for instance, it makes sense for a car dealership to devote more fiscal resources to customer acquisition than other services would, as the average person only buys a few cars in his or her lifetime.
- Cohort analysis. This allows you to evaluate specific groups of customers, such as people who bought Product A over a 12-month period or people who purchased a service on Date B. It can help you identify your “high performers” (i.e. those demographics with the largest gross profit margins) in order to replicate those results. Why did these individuals buy? How can you apply these findings to Group C? Cohort analysis can also measure your historical gross profit per customer. Is this number increasing? Decreasing? How can you encourage or reverse this trend? It is an important indicator of whether you are getting better or worse at making money per customer.
What to Do With Your Metrics-Driven Data
You can examine performance data eight hours a day, but it is only truly useful when you act on it. Once you implement tracking of the above metrics, the next step is to identify the particular levers that affect them. How can you lower your customer acquisition costs? How can you strengthen your retention rate? How can you ensure that the lifetime value of your customers—another important metric—is maximized? The executive team of any growing business should be laser focused on answering these questions.
Each business will find different solutions to these challenges, but remember that these solutions are much more likely to help improve your business if they are informed by careful data consideration.
Chuck Cohn is the CEO and founder of Varsity Tutors, a technology platform for private academic tutoring and test prep designed to help students at all levels of education achieve academic excellence.
