When you have a new start-up to take care of, you will be concerned to know how it is performing. The performance of the start-up will be critical to the long-term growth and sustainability of the establishment. Therefore, it is very important to measure the performance of the business entity. To be successful, a start-up must be able to provide good quality with consistency and ensure profitability while doing so. Let’s look at some of the important performance metrics that are relevant to start-ups and indicate the productivity, quality, profitability and consistency of new businesses.
- Customer Acquisition Cost (CAC) is essentially the cost that your start-up has incurred to acquire a new customer. While it is not practical to track the acquisition of each and every customer, the accepted way of measuring it is to pick the marketing and sales related expenses during a period and dividing it by the number of customers gained during the same period. Needless to say, your aim should be to keep the CAC low. CAC cannot be compared across industries. In industries with few clients, the CAC will be different from those with innumerable petty customers. Thus, this metric cannot be evaluated in isolation. For example, high CAC for a newly launched product priced at a higher margin is not a cause of concern.
- Customer Lifetime Revenue (CLR) is the revenue that you receive from repeat customers. Also known as Customer Lifetime Value, this metric helps you decide how much you can spend as CAC. Besides, it can also be an indicator of the quality of customer service/after sales service. CLR increases with better customer retention. However, it is not easy, and sometimes not possible, to determine the CLR for a start-up but it can be estimated in a business where the revenue is of recurring nature or subscription based.
- Revenue Run Rate is a metric to measure your sales performance over a period of time. It will help you to track how your business is developing over time. When you start a business this metric will help you to understand how to forecast, identify trends, patterns and peak and slack season etc. It will also help you with your pricing policy.
- ARPU (Average Revenue per User) measures the average contribution of a customer to the revenue. A healthy ARPU means that you are managing to generate more sales per customer. We all expect to have some customers who are more valuable than the others. With this metric, you can identify the valuable customers, the type of customers who generate more revenue, the products which are being more preferred by the high revenue customers and a host of other performance-related information. However, average doesn’t necessarily represent the sales performance as a whole. It does help you in targeting the right customer mix and optimising the sales with respect to the important customer types.
- Monthly Recurring Revenue (MRR) – While ups and downs in sales are monitored on an ongoing basis, Monthly Recurring Revenue (MRR) answers the important question of whether you are going to and able to register the existing sales in the future. Thus MRR is the metric that informs you how much of your sale is generated in the normal course of business and you can expect to have on a regular basis. It shifts the focus from the sales volume you have lost or won to what you can expect to generate during a given period. It helps you to focus on building a sale strategy that targets to build a sustainable business and a regular cash flow.
- Retention Rate – If you are in a business that thrives on long-term business relationships, Retention Rate is an important metric to measure the sustainability of your business. It gives you the percentage of customers that you have managed to keep with you and the percentage of customers who have ended their association with you, over a given period of time. Another name for this metric is the churn rate. Let’s assume that at the end of a period you have 100 customers. During the next month, if you add 50 more customers but lost 20 existing ones, you will end the month with 130 customers. Your retention rate will be 80% (100 minus 20) while the churn rate will be 20%. In the next month, your retention rate will be determined by how many of the 130 existing customers you manage to retain. The idea should be to keep the retention rate as high as possible.
- Return on Advertising Spending (ROAS) is an important metric as the advertisement is like an investment for start-ups. It is not difficult to calculate ROAS. It is simply the outcome when you divide your sale by the amount spent on advertising. However, you will have to ascertain the life cycle of the ad campaign and accordingly pick the period for the calculation. So if you think that your ad campaign will have a recall value of six months, you have to pick the six month period beginning with the campaign launch. If the sales during that period are INR 1,00,000 and the amount spent on the ad campaign was INR 20,000, the ROAS would be INR 5. In other words, you generated INR 5 for every rupee spent on advertising. While it helps to know how effective your ad campaigns are, it is particularly difficult to measure the effectiveness if you are running multiple campaigns. In case you are using multiple channels for advertising and marketing, you will have to put in extra effort to find out the contribution of a specific channel towards the sales revenue.
- Staff Productivity – As a start-up, you won’t be having a big workforce, but a few selected people in crucial positions. It is important to find out the staff productivity even early on in the business. It will help you find out under-utilised positions, man-hours lost and redundant processes. Keeping under-utilised resource in the payroll is a big risk for the business. Productivity can be checked for all types of position in the organisation and parameters for the same should be set. For example, if you have a customer support team, see what kind of support is being catered to. If queries and complaints are being resolved over multiple calls, it could indicate poor efficiency of the support team. The aim of staff productivity is not merely to point out the inefficiencies. You will be able to identify the pain areas and implement improvements in the same and eventually find out if those improvements are actually working. Staff productivity analysis is possible only by following the entire cycle of human resource management. When a new employee is hired, the responsibilities should be agreed. This will help you to finalise the productivity parameters. Once this is done, it becomes easier to monitor employee productivity on an ongoing basis. The regular monitoring of staff productivity gives you a scientific basis for appraising employees, rather than deciding the worth of employees on the basis of observations and isolated incidents.
- Operation Efficiency is an umbrella term that can cover several metrics. Alternately, it can be built as a single indicator supported by multiple metrics. The most simplistic approach to finding out the operational efficiency of a business is to see the ratio of sales to expenses like selling expenses, general and administrative expenses. An efficient organisation will be able to keep this ratio minimum. A healthy operational efficiency ratio enables the business to bring in a decent return on its investments and be able to invest in critical business areas.