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Choosing the right KPI metrics is pretty instrumental to your business success, even when you’re small. Setting the right goal will bring your team together and make sure everyone is working in the right direction. In addition, it will help detect problems and provide meaningful feedback so you can iterate quickly.
In general, there are 3 categories of business metrics that every startup should keep track of.
- Do you acquire enough qualified customers for your business?
- How efficient are your marketing and sales efforts?
- How long do your customers stick around?
- What kind of customers are more likely to churn?
- How much value can your customers bring?
- Does your business have enough cash flow each month?
The metrics you are tracking should answer these questions right away and provide guidance for what to improve. After months of research and speaking to dozens of startup founders, we have selected 7 key metrics that we believe can help you understand growth quantitatively.
1. Average Revenue Per Customer (ARPC)
ARPC is the average revenue from a single customer within a certain period. It can be calculated by various time frames, such as monthly, weekly or daily. ARPC can give you an overview of how much your customers currently pay for your product.
However, many would say that ARPC is more or less a vanity metric, since early companies may not even have a monetization model, it’s still a pretty important financial metric that every company should keep track of. First, it can calculate MRR and LTV (we will introduce them later). Second, it can reflect the financial health of a business. As you can see in the following graph, there is an increasing trend in ARPC. It shows the company grows over time and its upselling strategy works well.
However, if ARPC is far lower than your regular price, you have to make sure the marketing or sales team makes the right deals with customers. Discounts surely can stimulate sales temporarily, but the effect may not last a long time.
2. Monthly Recurring Revenue (MRR)
Like ARPC, MRR is also a metric to evaluate the financial health of a company. MRR means how much income is generated every month. You can calculate MRR simply by the number of customers and ARPC in a given month.
MRR is particularly useful for subscription-based companies since it can forecast future sales. Specifically, if a customer doesn’t cancel the subscription, you can expect to sustain your revenue for an extended period.
In addition, You can further break down MRR into New MRR, Expansion MRR, and Churned MRR to learn more about which factors influence your recurring revenue.
3. MRR Growth Rate
MRR Growth Rate means the percentage change of MMR within a specific time period. There are two ways to calculate it.
MoM (Month-over-Month) Growth Rate
The first one is MoM Growth Rate. It means the increase or decrease in monthly recurring revenue from one month to the next.
MoM Growth Rate can reveal subtle changes that cannot be discovered from MMR directly. Take the following graph as an example. Although MRR seems to increase over time, MoM Growth Rate has a decreasing trend first but rises again in June. Obviously, the business's growth strategy worked very well in June. Thus, it is worthy to examine the reason behind the growth.
Compounding Monthly Growth Rate (CMGR)
CMGR is the average month-over-month growth over a longer-term duration.
CMGR ignores the fluctuation of MoM Growth Rate and provides a big picture of the growth trend. In the below chart, CMGR shows the business has a positive growth (about 9%) within a half of the year even if MoM Growth Rate drops to the negative value once. In general, investors prefer to use CMGR to assess business's growth.
Basically, most SaaS companies have a growth rate of 10-15%. If your business pursues post-Seed/pre-Series A, you should make efforts to achieve around 15-20%.
4. Churn Rate
Churn rate is one of the most important metrics for a business. We all know that retaining an existing customer is much cheaper than acquiring a new customer. Reducing the churn rate can significantly increase your marketing efficiency. There are two ways to calculate the churn rate.
Customer Churn Rate (CCR)
CCR represents how many percent of customers leave your business. It is relatively intuitive and easier to understand. Also, it can be used for calculating LTV that we will mention later.
However, it assumes that all customers have the same contribution. No matter which customer leaves, the business suffers from the same amount of loss.
Revenue Churn Rate (RCR)
Instead of counting the number of customers, RCR calculates how much revenue a business loses from churned customers.
For example, if there are 5 customers, one of them churns.CCR is 1/5 = 20%. However, if the total revenue is $1200 and the churned customer contributes $400, then RCR is 400/1200 = 33%. For CCR, losing one customer is probably not a big deal, whereas, for RCR, that's a huge loss for the business to lose this customer.
Typically, the customer churn rate is around 3% to 7% in subscription companies. B2C companies have a slightly higher churn rate than B2B companies on average.
5-A. Customer Acquisition Cost (CAC)
Marketing and sales efforts can bring new customers to a business, but they are also very costly. No businesses have unlimited resources to spend on sales and marketing. However, by choosing marketing tools smartly, you can balance the total cost of sales and marketing efforts and maximize your sales. CAC is one way to evaluate your current marketing cost.
CAC can be used in several ways. One way is to compare different marketing channels and determine which tools are cheaper. It can give you some guidance about how to allocate your marketing budget.
As you can see in the above graph, content marketing seems to be more expensive than other channels. However, it doesn’t mean you should give up doing content marketing. You should also consider how much value each customer can bring to your business (called LTV). Thus, you can determine whether it is worth investing your budget in this channel.
5-B. Customer Lifetime Value (LTV)
LTV is how much money a customer will bring your brand throughout their entire time as a paying customer. In other words, LTV forecasts how much revenue a customer can bring in his or her lifetime. The simple way to calculate LTV is to divide ARPU by customer churn rate.
Dividing 1 by customer churn rate represents the average length of customer lifetime. For example, If the churn rate is 10%, then the lifetime is 1/10% = 10. It means that a customer can be expected to stay for 10 months on average. Finally, LTV can be adjusted by a constant (here we use 0.7) to lead to a more conservative estimate.
LTV is a useful tool to help businesses to identify valuable customers since higher LTV can result from a lower churn rate or a higher ARPU. You can observe LTV of various customer groups and put your efforts on some of them.
6. LTV to CAC Ratio
Generally, we won't look at CAC and LTV separately because the two metrics are interrelated. Take the following graph as an example. As we can see, LTV keeps growing over time although CAC remains stable. In other words, even if you spend the same amount of costs, the customers that you acquire bring more values. It implies that marketing and sales become more efficient.
To improve marketing efficiency, companies should make efforts to increase margins between CAC and LTV. LTV/CAC ratio is an indicator for measuring the difference between two metrics.
LTV/CAC ratio can let you know how well your growth strategies are and help you allocate your marketing budgets. Typically, a good benchmark for LTV/CAC ratio is over 3. It means that the average value of customers is three times more than the cost of acquiring them. In other words, your business can earn enough to cover the costs and further acquire additional profits.
When the ratio is 1, it means that you don’t earn anything and have to lower down the costs. However, if the ratio is too high (around 5), you should consider increasing the budget on marketing to speed up customer acquisition.
Monitoring Metrics on a Real-time Dashboard
Once you have established pipelines for measuring these metrics, you’ll want to establish a real-time dashboard to monitor these metrics. Acho offers a built-in tool called Visual Panel for this. By setting up Data Sync, you can make the dashboard updated automatically.