Startup founders risk information overload. As you grow your team, you’ll probably get reports and updates on how various facets of your startup are faring. It’s a lot to take in. You might even reach a point where you start to miss the forest for the trees.
It’s part of the reason that founder burnout is a common problem. And it’s also part of the reason startups fail.
Fortunately, the reverse can be true. Even with a constant flow of information coming your way, if you know the most important areas to consider, you’ll be able to filter to find what matters most.
With that in mind, we’ve lined up five metrics that matter for any startup that wants to scale successfully. If you keep these five key performance indicators (KPIs) in front of you, you should always have a good idea of where your startup is at and, just as importantly, where it’s headed.
We’ll be using a lot of initialisms here, so let’s lay down a quick glossary. Just in case you’re not already familiar, here are key terms:
- MRR: monthly recurring revenue
- ARR: annual recurring revenue
- DAU: daily active users
- CAC: customer acquisition costs
Now, without further ado, let’s talk about the five metrics your startup should be tracking:
#1: MRR and ARR
We know, this is technically two metrics. But because they’re so closely intertwined, it shouldn’t take you much more work.
Most tech startups measure their MRR as all of the money coming in via subscriptions or other recurring user fees minus losses via downgrades or cancellations. It seems relatively simple — and once you set up the proper tracking procedures, it is. But from the outset, you need to think about what MRR looks like for your unique startup.
Some areas to look to as you total up your MRR include:
- New subscriptions/recurring user fees
- Renewed subscriptions/recurring user fees
- Payments for upgraded services/features or more user seats
Then, from the number you arrive at, subtract:
- Money lost from nonrenewals/cancellations
- Money lost from downgrades or fewer user seats
As a startup, it generally makes sense to primarily track MRR. Then, you can look over the last twelve months of MRR to calculate your ARR.
As your business grows — and particularly if the majority of your users pay for an annual subscription — it may make sense to track ARR more closely than MRR. But either way, you should always keep a finger on the pulse of money your company is netting on a recurring basis.
Your daily active users can go a long way toward helping you predict and prevent churn (we’ll talk more about churn later). Essentially, you want to measure how many people actively use your website, app, software, etc. each day.
The way you define “active” will depend on what you offer. In some cases, a simple login is enough to indicate that they’re engaging with your company in a way that will likely keep them coming back in the future. But in other cases, you may want to define an active user as one who completes a transaction, a specific activity, or something else.
A growth in DAUs indicates that your startup is trending in the right direction. Stagnation — or worse yet, a decline — shows that you have an issue you need to address.
You can acquire some customers at no cost. There will always be those that find you organically or hear about you from word of mouth, for example. But many customers come at a price.
While every startup needs a marketing and sales budget, it’s important to track how that money is spent and the return it sees. In fact, you may want to break down CAC into specific categories (e.g., social media ads, trade shows, salesperson expenses). That way, you can see if any areas are particularly high.
If you’re spending $1,000 on Google Ads but they’ve only generated two customers, for example, that puts you at a CAC of $500. That’s a fairly high number and it likely makes sense to redirect what you’re spending there into more successful categories. Or, at the very least, to reevaluate your strategy.
Here, we’re talking lost users. By tracking MRR/ARR, you should have a handle on this number. But it’s worth looking at closely because it’s one of the most illuminating areas when it comes to challenges that your startup could face.
You may want to track both user churn (the number of lost users over a certain time period compared to overall users in that time) and revenue churn (revenue lost over that time period compared to your gross revenue). You might see that you’re losing users but your revenue isn’t necessarily dipping, indicating that you’re losing lower profile users. This might not be a major cause for concern.
But if user and revenue churn start to climb up, do some digging. Is there a new competitor on the scene? Are you getting outpriced? Are negative reviews circulating? Catching issues early helps you nip them in the bud.
#5: Growth Rate
Now, let’s look at the other side of that coin. How fast are your sales growing month to month? Specifically, we recommend looking at your compounded monthly growth rate (CMGR) every six or so months. To do that, you can use this equation:
CMGR=Sales in the current month/Sales in the first month of the period ^(1/number of months) – 1
Checking in with your CMGR regularly will show you if your growth is trending in the right direction.
If you keep tabs on these five areas, you should be able to maintain a clear view of your startup and its trajectory. Plus, you’ll be able to demonstrate both to key parties like your Board and investors.
For help measuring all of these KPIs, don’t hesitate to get in touch with our team of accountants who specializes in serving tech startups. We understand that founding and scaling a startup requires focus and we can take metric tracking off your plate.