7 Metrics for Consumer Startups to Track

Revenue is essential, but an obsessive focus on it can have long-term limitations for start-ups. As such, investors and owners need to understand that revenue is only one metric whose growth depends on many other metrics and KPIs.  

By tracking metrics, start-ups can gauge their performance objectively, and understand their business intimately. It helps owners and investors identify the company’s Key Performance Indicators (KPIs), monitor the start-up’s progress and spot potential pitfalls before they occur. When used constructively, metrics can be the basis for developing strategies to optimize company performance and increase profit

Though they may vary in terms of clientele and market segment, there are vital metrics every start-up must pay attention to. Below are some key metrics anyone hoping to create a start-up should track.

Customer Acquisition Cost (CAC)

Custom Acquisition Cost is essentially the cost to attract a new customer. This metric is vital in the early stages of the start-up because it can help you identify a cash-burn pipeline disguised as advertising and marketing. Most start-ups, in desperation to increase revenue, tend to commit a lot of resources towards growing their customer base. This could, however, be counterproductive to their progress. Since it costs money to acquire customers through advertisements, promos and freebies, the question should be how profitable? 

Start-ups need to figure out how much it costs them to acquire each customer. It will enable them distinguish if the business is maintaining liquidity or making income. A high CAC compared to other in the industry is usually not a good sign as it indicates that you may be spending too much to acquire new customers. When the business is just starting, a high CAC may not matter, because most of the money is spent on creating brand awareness. The expectation is that over time CAC reduces as patronage increases. 

The easiest way to calculate CAC is to pick a specific period and then divide the cost of marketing and sales for the selected period by the number of customers you gained during that period. For example, if you spent $2,000 to get 25 customers, your CAC is $80.

Customer Retention Rate (CRR)

This shows the number of customers that the company is able to retain over a given time. It is the inverse of churn rate, which shows the percentage of customers a company has lost over a specific period. Start-ups often make the mistake of focusing on their CAC to the neglect of their CRR. This can make the road to profitability an uphill task. 

Customer retention saves the company cost in the long term because it is less expensive to retain an existing customer than to acquire a new one. Acquiring a new customer costs five times more than retaining an existing customer. The success rate of selling to an existing customer is 60-70%, in comparison to the success rate of selling to a new customer which is 5-20%. By Increasing customer retention by 5% alone, start-ups can increase profits by as much as 95%.

Customer retention helps build long-term relationships with your customers because it shows how much value they place on the company’s product or service. If your customer retention strategy is top-notch, you can turn your customers to your brand ambassadors as they would spread the word of your product or service within their circles of influence.  

An easy way of calculating your CRR is subtracting the number of new customers from total customers at the end of a given period, then dividing that number by the number of customers you started the period with.

Customer Retention Rate = ((EC-NC)/SC)*100, where:

 EC - number of customers at the end of a period

 NC - number of new customers during that period

 SC - number of customers at the start of that period

 For example, if you started the month with 30 customers, gained 10 new ones, and lost five, the calculation is 35 (total customers at the end of the month) minus 10 (new customers) equals 25, divided by 100 equals 0.4 or 40%. That means you kept 40% of your customers.

There are a plethora of other customer metrics that can be fed into CRR such as: How long on are customers inactive before they make purchases? How long on average, does the start-up retain customers? What seasons or period do you retain customers the most? The primary issue is establishing what level of CRR enables the start-up to operate at a profitable level. 

Customer Lifetime Value (CLTV) 

This metric measures the revenue a business receives from its repeat customers. By measuring CLTV in relation to CAC, start-ups can measure how long it takes to recoup costs spent to acquire a new customer. CLTV also enables start-ups to calculate how much revenue they can expect to generate over a given period. The longer a customer patronize a company, the higher their lifetime value. A company with a high CLTV can afford to spend more to acquire customers.

CLTV can be used as a model to evaluate customer service efficiency because it is a metric that is directly influenced by customer support. Customer support staff play a critical role in customer retention by solving problems and offering recommendations which ultimately influence the perception of customers towards the company. The quality of customer service would make customers stay loyal or churn. If the CAC is higher than CLTV, then the business would most likely fail. 

Referral rate

This metric is a spin-off from CRR, but equally just as important. This is the number of new customers introduced to your business by your existing customers. Referral rates can grow organically or mechanically. If existing customers are impressed with the value of the company, they can advertise the business by word of mouth, thereby growing the customer base organically. Companies can also provide incentives to existing customers, such as discounts if they refer new customers. 

The higher the referral rate, the lower the CAC would be in the long term, which implies more profit for the company. An excellent way to determine a referral rate is by inquiring how the customer got to know about the company.  

Decision-making speed

In a highly competitive environment, the speed at which a business is able to make decisions could have implications for profit. Today's fast-paced change brought about by technology has made it imperative for companies to see quicker decision-making as a key driver in value creation. By increasing their decision-making speed, start-ups can make good choices faster and increase the complexity of the issue they address, thereby achieving the highest value from decision timing.

While this metric is often overlooked, its opportunity costs are staggering. According to a McKinsey survey, An average of 37% of the managerial time is spent making decisions, 58% of which is used ineffectively. Company size, internal structure, and leadership style influence the decision-making speed of companies.

One way to measure this is by maintaining a time log for every issue which the company intends to address, and the time when the issues were closed out (resolved). For example, how long it took a company to start a new service or launch a new product.

Burn rate

This metric measures the rate at which a company depletes its cash reserve. Start-ups generally have a negative net income in the early stages because the company is focused on growing its customer base and improving its product. Burn rate refers to the amount a company is losing until it breaks even. It enables owners and investors to know the financial health of the company and how long the company can operate before it runs out of money.  

A high burn rate suggests that a company is depleting its cash supply at a fast rate. It indicates that it is at a higher likelihood of entering a state of financial distress. Burn rates may be fixed or variable. A fixed burn-rate looks at the company’s operating expenses (rent, salaries, overhead, etc.) while the variable burn-rate (cost of sales, direct costs of goods, etc.) are those expenses that vary each month. 

Margin

This is the most important metric, but as highlighted earlier, its performance is tied to how other metrics are optimized. Margin is a measure of a company’s profitability (earnings) relative to its revenue. There are three types of margin metric which can be used to measure a company’s profitability. These are gross profit margin (total revenue minus cost of goods sold), net profit margin (revenue minus all expenses, including interest and taxes) and operating profit margin (revenue minus cost of goods sold and operating expenses).  

Operating margins may not be meaningful, but they provide insight on how much the company spends to be in operation and ways it can trim its production costs without undermining value. Gross margins tell how well the start-up is driving its products and what stage of the curve your business is in. Net margin shows how macroeconomic factors such as interest rates and taxes affect profits.

For a clearer perspective and more detailed analysis, start-ups can measure their margins in different time frames (monthly, quarterly annually) and across different demographics (income class, age, industry, geographical area).

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Metrics provide start-ups with the tools to measure their progress and make more effective business decisions. While most start-ups tend to focus on product and brand development, having a holistic metric model is paramount to maintaining sustainable competitive advantage. An understanding of metrics also enables growing brands to understand their market better, identify potential areas of profitability, and build out areas of competency. As such, before investing in growth, know the key metrics of your business. This will likely be the deciding factor between profit and loss for your company.