It is frustrating to start a business venture that seems stagnant year in and year out. Every entrepreneur would like to see their start-ups pave through initial challenges and grow to great heights.
But how do you know that your start-up is growing? With so many analytics platforms and endless metrics that “experts” advise you to track, finding the proper signal in the noise can be confusing.
Many business owners get frustrated after realizing they spend time tracking vanity metrics that do not help in making valuable decisions.
For instance, metrics like Twitter followers, website sessions, and email subscribers may show that your business is doing well. Still, they may not translate to increased revenue growth, which is every start-up’s bottom line.
Fortunately, this article considers how growth metrics can help you make better business decisions. We will prioritize the top 8 business growth metrics you should keep tracking.
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Functions of Growth Metric
Growth metrics should help a business owner know the following:
- Whether the business is financially viable
- What is working or not working for the business?
- Where can the business focus on and improve?
Growth metrics for transaction-based businesses may not be the same as subscription-based businesses because the latter collects revenue over time while the former collects revenue upfront.
So, know your business model and choose the right growth metrics for your establishment. Most useful metrics focus on customer acquisition and retention.
Here are the fundamental financial metrics you need to track to grow your business.
1- The Cost Of Acquiring Customers
Customers determine your business revenue; however, acquiring them takes time and money. So, customer acquisition cost (CAC) is a key performance indicator you want to track to establish if they will be profitable soon.
Initially, your business may not be profitable, but you have to know the time you will take operating without profit before becoming profitable.
How do you calculate your business’s CAC? Choose a specific period and divide sales and marketing costs by the number of customers that came in during that period. For instance, if you spent $80 on sales and marketing in one quarter and acquired four customers, your CAC is $20 per quarter.
You want your customer acquisition costs to be lower; however, it is okay even if the cost is higher when you want to impress your target customers.
Every entrepreneur desires to keep this cost low, especially if they are not launching a new product; otherwise, it is a sign of danger. For more about CAC, check out this article from Mailchimp.
2- Lead Conversion Rate
This growth metric measures the number of leads you convert into customers in one month. How you determine a reasonable lead conversion rate varies depending on your business model.
Some business models, like freemium apps, may have a low lead conversion rate, but that does not mean you cannot intentionally measure and work to improve it.
You can improve your business educational content, onboarding experience, product tours, and triggered emails to convert quality leads into customers. Once you increase your lead conversion rate, you can make the best of your customer experience to keep your clients loyal.
Here is how you calculate your lead conversion rate:
- You take the number of new customers in the last month and divide it by the number of leads in that month, then multiply by 100.
- For example, if you had 20 new customers in the last month (30 days) and 100 leads during that period, your lead conversion rate would be (20÷100) x 100 = 20%.
- A higher lead conversion rate signifies potential business growth and profitability.
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3- Customer Retention Rate
Although most start-ups are obsessed with acquiring new customers, studies show that existing customers are more valuable (Source: Forbes) So, spend time nurturing what you already have; otherwise, your existing customers will feel unappreciated and move to your competition.
One motivation to be concerned with customer retention is your Customer Acquisition Cost (CAC). Acquiring these customers may cost you a lot of money; therefore, ensure they remain in your basket.
It does not make sense to neglect your current customers and spend more money attracting new ones.
You can calculate your customer retention rate through a specific period by subtracting new customers from the total number and dividing the result by the number you had at the beginning of that period.
For instance, if at the beginning of your quarter you had 150 customers, you added 30 new ones but lost 10, you will complete the quarter with 170 customers.
If you subtract new customers (30) from this figure, you get 140. You will then divide it by the number of customers at the start of the quarter (150) to get 0.93.
This means that your customer retention rate is 93%. And, of course, we smile at a higher retention rate.
As you measure this growth metric, you should be concerned about three customers:
- The current customers who regularly use your product
- The inactive ones who stopped or slowed down on consuming your products
- Churn customers that completely stopped consuming your products.
It is normal to lose customers, but you should not lose more than your business can handle, hence the need to measure the churn rate.
4- Churn Rate
The churn rate is often calculated by dividing the number of lost customers by the number of customers at the beginning of the measuring period.
If your churn rate is higher, you can change your strategy to revive them because it is easier to get a lost customer back than to acquire a new one.
Make it your aim to ask your customers how you can improve your services. Customers whose opinions are valued tend to remain loyal because they feel honored.
You can include customer engagement as part of your business policies so that you do have to wait until they stop buying or slow down before you ask their opinion.
Social media pages are an excellent place to engage your customers.
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5- Customer Lifetime Revenue (CLR)
Another key metric for start-ups you want to track is the customer lifetime value which measures revenue from the current active customers. It may be challenging to measure this metric when you start, but as you continue to collect data, it will be easy to project how much you can earn from a customer.
Assuming that an average customer stays with your business for two years, your CLR can be calculated by multiplying a specific customer’s monthly revenue by the months you predict they will stay loyal to the company.
As an entrepreneur, you are interested in customers with high CLR and low CAC. Knowing a customer’s lifetime revenue can decide how much to spend on customer acquisition.
A high CLR signifies that you are on the right track with your customer service and product. However, it is essential that you do not settle but continue getting customer feedback to improve.
6- Organic Traffic
Most businesses have an online presence because it is here that they draw and converts valuable customers through their marketing efforts. Your SEO strategy is not cheap, and you would like to see this investment generate organic traffic.
High organic traffic shows that your business or brand resonates with people. The more customers read your content, the higher the chances of them converting and becoming loyal customers.
You can enhance organic traffic by creating high-quality and people-oriented articles. Customers should find value in your content, so avoid over-optimizing for search engines; otherwise, your traffic may not convert.
Ensure you address your potential customer’s pain points to keep them coming for more information.
Higher organic traffic is a good growth indication because it shows people are interested in your products.
7- Cash Burn Rate
Since we are talking about start-ups, the cash burn rate is a vital key performance indicator. Your start-up will likely operate at a loss initially because money out is often higher than money in.
The cash burn rate establishes how fast your business is burning or spending money. It helps you to know how long your business can run before it is out of money.
You can use this metric to plan your funds because investors and venture capitalists also need these figures to know whether to fund you or not.
Most start-ups die early because they have run out of money. If you have an unfavorable cash run-away rate, you may miss out on help from venture capitalists.
However, this does not mean that you should have the slowest cash burn rate because venture capitalists may consider it a red flag and a sign of slow growth.
Therefore, you should find the right balance between growth and profitability. As a business owner, you should plan whether to invest your profits into the business or retain them.
8- Profitability
Unless you are running a non-profit organization, your main reason for starting a business is making profits. Profit margins are part of your business’s revenue after the expenses have been sorted out.
It is probably one of your start-up’s most important long-term growth metrics.
You can begin by tracking the gross profit margin, and the revenue percentage, after deducting the cost of goods sold (COGS).
Gross profit margin= Gross profit/ sales revenue) x 100.
The next step is calculating the operating profit margin as the revenue percentage after deducting administrative, operating, and overhead costs.
The metric to measure is the net profit margin to help you determine your bottom line. It is what remains after accounting for taxes, debt repayments, and one-off expenses.
Profitability metrics help you to know how your business performs yearly. Of course, you may not make a massive profit at the beginning of your start-up, but the subsequent years should show signs of improvement.
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Final Thoughts
Regardless of your experience in business, it is essential that you follow the right KPIs to keep your start-up in the right direction.
You want to monitor the cost of customer acquisition, lead conversion rate, customer lifetime value, retention, churn rate, and profitability to know where your business stands. Ask yourself, what are my growth metrics showing about my start-up?
So, are there long-term performance metrics for start-ups an entrepreneur should track that we have not included in this list?
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