You're an early-stage founder trying to get your start-up off the ground. You spend long hours on research, talking to customers, and improving your product. But how do you know if all these efforts make your business grow?
The answer is “Metrics”.
Crunching your numbers isn't just for investor reporting. It also reveals what's going wrong (and right) in your business so you can make better-informed decisions.
So how do you start?
We've put together a list of essential metrics, along with their definitions, examples and formulas to get you going.
Tip: Bookmark this page for future reference.
Revenue is the income generated through business operations over a specified period. It appears first on a company's income statement and is a critical figure to track in your business.
For a product-based business: Number of units sold x Average price of goods
For a service-based business: Number of customers x Average price of services
It's a common misconception that revenue and bookings are interchangeable. Bookings refer to the total value of all contracts over one year, including one-time fees.
A booking occurs when a customer commits to paying for a service, and it converts into revenue once the service is delivered. As such, bookings help to project future revenue.
Bookings and revenue that don’t match up indicate an issue in the implementation phase of your start-up's services.
Cost of annual subscription + Any one-time fees
Gross Merchandise Value refers to the total amount of money made from transactions over a specified period. This metric is fundamental to start-ups with an e-commerce or marketplace business model. Although it gives insight into the size of your marketplace, it shouldn't be the only metric used to measure growth because it doesn't show if your business is making a profit.
Selling price of goods x Number of sales over a specified period
There are two ways to measure Recurring Revenue: Annual Recurring Revenue and Monthly Recurring Revenue.
Annual Recurring Revenue (ARR) refers to the average revenue your business expects to receive on a yearly basis.
Monthly Recurring Revenue (MRR) refers to the average revenue your business expects to receive on a monthly basis.
These metrics are primarily used by start-ups with a subscription-based revenue model. Both ARR and MRR should exclude one-time fees.
Investors interested in these start-up models look at these metrics to gauge the revenue that the business expects to generate over a given period. The SaaS space is known for its high overheads, so the ARR and MRR will provide insight into the start-up's financial health.
Recurring Revenue Formulas
ARR = Number of customers x Cost of average annual subscription
MRR = Number of customers x Cost of average monthly subscription
Other than a shared acronym, this metric is fundamentally different from Annual Recurring Revenue.
Where Annual Recurring Revenue is calculated from real recurring revenue components (excluding one-time fees), Annual Run Rate is a projection of future total revenue based on past, short-term revenue, assuming that current conditions continue. Unlike Annual Recurring Revenue, this metric includes non-recurring fees.
Annual Run Rate Formula
Annualized Run Rate = Revenue from your latest quarter x 4
Average Revenue Per User is the average amount of money a start-up can expect to generate from one subscriber, user or customer over a specified period.
Investors use this metric as a comparison tool to assess your start-up's performance against others operating in the same industry. Internally, an upward or downward trend of your ARPU indicates if your segmentation or pricing is working.
ARPU over a specified period = Revenue from all subscribers / Number of subscribers
Billings refers to the amount on invoices due for payment according to the terms in your contract.
Billings are a better indication of your business health. Tracking revenue alone downplays the true value of your customers because the payment for your services isn't upfront but deferred over a specified period and only accounted as revenue when the services are delivered.
Cost of annual subscription / Payment terms*
*For example, monthly, quarterly or bi-annually.
Burn Rate refers to how quickly your start-up is using its cash reserves. Measuring your Burn Rate allows you to project when you'll run out of money (Runway). The goal is a negative Net Burn Rate, which indicates that you're bringing in more money than you're spending.
Burn Rate Formula
Gross Burn Rate = Total cash used monthly (monthly expenses)
Net Burn Rate = Money out (monthly expenses) - Money in (monthly revenue)
Customer Acquisition Cost refers to the total cost to acquire new users or customers on a per-user or -customer basis. Make sure to factor in all the costs associated with your acquisition efforts, such as paid advertisements, referral fees and discounts.
Calculating the total acquisition cost will shed a clearer light on your start-up's budget for sales and marketing across different channels.
There are two types of CAC: Paid CAC and Blended CAC. Paid CAC refers to new users or customers acquired strictly from paid marketing campaigns. Blended CAC includes all new users or customers from all channels, even organic ones.
Paid CAC: Total acquisition cost / New customers acquired only from paid marketing campaigns
Blended CAC: Total acquisition cost / New customers acquired across all channels
Gross Profit, also known as Gross Income, refers to the amount of money a business earns after deducting the costs incurred in making and selling a product or delivering a service. Mind that the costs refer to variable costs only, not fixed costs.
Gross Profit reveals whether a business is operating efficiently compared to its competitors.
It is often confused with Gross Margin, the percentage representation of Gross Profit in relation to its revenue. Monitoring your Gross Margins over time can indicate if you're on track to profitability despite the costs incurred.
And what about Profit Margin? Both Gross Margin and Profit Margin measure the profitability of a business in relation to its revenue. Profit Margins, however, refer to the percentage of total revenue that remains after deducting all costs, taxes and other administrative expenses.
Gross Profit Formula
Revenue - Cost of goods sold
Total Contract Value consists of recurring revenue and one-time fees over a specified period. It shares a similarity to Bookings, which refer to the sum of recurring revenue and one-time fees over one year.
TCV helps project future revenue and guide budget management to help you scale more effectively.
(Subscription cost x Subscription period) + One-time fees
ACV refers to the average revenue per customer over one year, excluding one-time fees.
Customer Lifetime Value predicts the net profit you can earn from a customer before they stop buying from you.
Compare this with your Customer Acquisition Cost to reveal the health of your business model and better plan your marketing budgets.
Customer Lifetime Value Formula
(Annual revenue per customer x Customer relationship in years) – Customer acquisition cost
Sell-Through Rate measures how much of the inventory you received was sold over a specified period and, as a result, how fast the investment in inventory converts to revenue. The ideal sell-through rate differs across industries, but the general goal is 80% and up.
Sell-Through Rate is often confused with Inventory Turnover, which refers to the speed at which your inventory is sold. It specifies the number of times a business has to restock over a given period. Investors are attentive to this metric as a high inventory turnover indicates wise business spending and consistent market demand for a product.
Sell-Through Rate Formula
(Number of units sold / Number of units received) x 100
Active Users are the users who open and engage with your product or service, either on a daily or monthly basis.
The number of Active Users provides a general indication of your business health. And more importantly, it serves as a basis for calculating other key financial metrics like Growth Rate and Lifetime Value.
To start on the right footing, it's crucial to specify what actions qualify someone as an Active User. For example, a user who logged into your app. Or someone who shared or liked a piece of content.
Active Users are often confused with Registered Users. A registered user is an individual who signed up for your product or service. But since the metric only accounts for sign-ups and not actual engagement, it doesn't provide insight into your growth or revenue potential.
Churn Rate refers to the rate at which users, customers or subscribers stop using your service over a specified period. This metric is essential for subscription-based businesses to track, as the volume of customers is a crucial contributor to total revenue.
Numbers aside, churn is a good indicator of customer satisfaction and helps you assess the effectiveness of your customer retention efforts.
Customer Churn Rate is not to be confused with Revenue Churn Rate. Revenue Churn calculates the rate at which businesses lose revenue due to cancelled or downgraded subscriptions over a specified period.
Customer Churn Rate Formula
Monthly Churn Rate = (Number of lost customers over the month / Number of customers at the start of the month) x 100
Net Promoter Score uses a single survey question to measure user or customer satisfaction. The result is a good indicator of their future loyalty to your product or service. Calculating your NPS and identifying ways to improve it is a reliable way to increase revenue and minimise churn.
This survey question might sound familiar to you: "How likely are you to recommend our product/service to your friends and family?" Respondents will answer with a score of 0 to 10, with 0 being not likely at all and 10 being extremely likely.
Based on the responses, you will sort them into three groups: Promoters, Passives and Detractors.
Promoters (9-10) are likely to repeat their purchase in the future and refer others to you. Passives (7-8) are neutral to your offering and not usually enthusiastic enough to refer others. Detractors (0-6) are unhappy with their experience and likely to discourage others from purchasing from you.
NPS = % Promoters - % Detractors
A cohort refers to a group of individuals who first use your product in a specified time window.
When you start tracking your different cohorts, you can draw insights like whether your product remains useful to them over time, how updates and new features affect their decision in continuing their usage and how each cohort impacts revenue.
Analysing your cohorts can improve your efforts at retention, reducing churn and creating user loyalty.
Compounded Monthly Growth Rate refers to the month-over-month growth rate during a specified period, anywhere between 6 to 24 months.
This metric allows you to track average growth in the contexts of users and revenue in a given period.
CMGR = [(Latest month / First month) ^ 1/(Number of months difference)] -1
Viral Coefficient, or Virality, is the number of new users each existing customer generates.
This metric gives insight into the number of referrals that convert into customers. For companies with referral programs in place, this metric helps determine their effectiveness.
A positive Viral Coefficient indicates high customer satisfaction and a willingness to spread the word about your business.
While many metrics matter in a way, it doesn't make sense to track them all. First, it's too time-consuming and second, you need more focus to grow your start-up.
That's why start-up companies should choose Key Performance Indicators (KPIs) to track. KPIs are measurable values that indicate how effectively a business is achieving a pre-defined objective. They generally fit into five buckets: Customer, Financial, Operating, Marketing and Sales KPIs. Which ones you should track depends on your business type.
KPIs make sure your business stays on track and focuses on the right goals. However, as you're tracking multiple metrics, it's often hard to align the entire team. Therefore, start-ups should consider choosing a North-Star metric. This is just one—in some cases up to three—metric that the entire company focuses on, from sales to accounting.
Again, the relevant North Star metric for your company depends on your business model. It can be very company-specific like Airbnb's "nights booked".
Presenting your metrics is an essential part of the fundraising process. But when it comes to preparing your metrics for potential investors, it’s easy to get caught up in what you think they want to see or limit yourself to the numbers that look best.
In reality, investors want to know your unique knowledge about your product or service, your plans to scale and a small number of accurate metrics that will prove your business health.
Here are some tips to keep in mind when preparing for a presentation:
Investors are interested in these basic metrics to assess the size and growth of early-stage businesses.
Keep track of these essential start-up metrics to monitor your company. In time, a good command of these metrics will also allow you to find suitable investors. But remember to be honest, and don’t try to fool yourself or anyone else.
During a lecture on business models and metrics in 2019, YC Continuity Partner Anu Hariharan said, “No YC startup had a chart straight up into the right. Even the most successful companies didn’t either, so I think the most important thing is to really be honest, measure and fix things right.”