In order to run your business effectively, you have to be on top of several key numbers.
There is a mind-bending amount of metrics and data involved in even a young startup. You cannot afford to ignore the analytics or facts. Even if you are willing to gamble going forward blindfolded, you can't expect others to invest or come along for the ride without you knowing.
At best you won't be nearly as competitive and profitable as you could be. You certainly won't be taken seriously by angels and venture capitalists.
So, which metrics do you really need to know? Which are the musts that will ensure you stay in business and can sit down at an investor meeting without being dismissed in seconds? The metrics below are some of the ones I cover in my fundraising training. You will need to nail them if you want to land investors.
1. Customer acquisition cost
How much does it cost you to get a new customer?
It's one of the top questions potential investors will want to know. It's also a vital number for entrepreneurs to know to understand their own finances, profits, marketing options and what they can afford to offer in return for loans.
This number is probably a lot higher than you think. Be sure you are doing all the math.
2. Churn rate
What's the difference between the number of new customers or users you are adding versus the number you are losing? That's important.
Adding new customers or users or visitors is great. Though if you are quickly losing them there is a problem. The content, service or product isn't living up to expectations. Or the customer service or delivery is letting them down. Or it could be that you are being undercut by a competitor or your pricing is simply too high to be sustainable. Whatever it is, you need to dig in and talk to those former customers to find out why they left.
3. Customer lifetime value
What's a customer worth to your business over their lifetime with you?
If you don’t know this metric, you don't really know what a customer is worth at all. Without knowing this information, you can't make a good judgment on what reasonable acquisition costs are, or when you can afford to let them go versus fixing an issue. You can also bet your competition is using this figure to formulate their offerings, prices and what they are willing to giveaway.
This number is usually far higher than you think. Potential customer lifetime can be very broad and long. In a simple SaaS B2B setting, you might have a few years with a client at a base rate. Though you may end up offering a large variety of upgrades and integrations over the years. You may acquire other companies that serve these same customers in different ways, compounding their value and revenue potential. In real estate, you may have customers that are worth over $5,000 per transaction. Some may be worth 10 transactions a month. Others once every several years, plus annual referrals and the opportunity to serve their extended family and heirs. That can add up to quite a bit.
4. Net profit
This metric appears to be quite often dismissed or overlooked in today's startup environment. Or at least booted down the runway. Neglecting net profit (along with cash flow) is, of course, the primary culprit behind the bankrupting of many, many companies, young and old when things tighten up. Some might argue that you don't really have a business without net profit. Or at least a goal and timeline for making it.
In addition to knowing your cost of goods sold and profit margins, you also need to know your true net profit, after all expenses, debt service and taxes.
5. Lead conversion rates
How many leads does it take to get to a sale?
This is more important than just knowing your customer acquisition cost. It will help calculate that. Though it goes even broader. Be wary of getting lost in traffic figures. Optimization is great, though many go off on too many detours if they are not online marketing specialists. There are many variables involved. You could go blind. Defer as much of this to an expert who can simplify the findings and take the lead on solutions by themselves.
However, specifically talking about sales leads to actual sales is a top metric to know. Firstly, because it shows you how amazing your sales team is. Or where there is room for significant improvement (in sales or lead quality). It's also a quick tool for evaluating marketing channels. If one channel costs you $150 dollars per lead and you are only converting 1 out of 4, you are paying $600 per sale. If your product only sells for $500, that may not be a viable channel. Not unless your lifetime value is far greater.
6. Burn rate
You can bet investors will want to know this metric. This is how much cash you are burning through each month. It determines how much investment capital will be burned on operating expenses, and how fast. It shows you how much time you have left before you run out of money. As well as how soon you need to begin raising money for your next round.
7. Customer satisfaction
How satisfied are your customers? You can detail this through online review ratings and in-house or independent surveys. Without a reasonable amount of customer happiness, your future is going to be pretty cloudy. It will have an immediate impact on sales and customer acquisition costs. Fortunately, this is also an opportunity to ensure you are connecting your product to the right customers, as well as finding ways to improve your product and customer service.
8. Employee satisfaction
Even a lot of entrepreneurs who nail the above completely overlook the vital importance of employee satisfaction. With sites like Glassdoor, everything is far more transparent than it used to be. Word spreads fast, is highly visible and stays up there. Everyone from potential hires to prospective customers, vendors and investors can instantly see what your current and past employees have to say about the culture and CEO. It will impact who you can hire, the vendors you can use and how others see the future of your venture. It's not worth shorting a contractor $25 to wreck your reputation.
Your total addressable market, or TAM, should be a key metric in your business plan and pitch deck. It's one of the most basic numbers for your business. That is, how many real potential customers do you have?
Realistically, no startup should or can expect to gain a 100% market share. Trying to capture an entire market, without first targeting several niches, price points, customer sizes or geographical areas for rollout, is going to be financial suicide for the vast majority of entrepreneurs.