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Earn Before You Burn: Why Unit Metrics Should Matter For Startups

Earn Before You Burn: Why Unit Metrics Should Matter For Startups

Relevant and meaningful business data is imperative to the success of any startup. It helps entrepreneurs to take well-informed decisions to scale up their businesses. And, metrics is a tool which provides the relevant business data critical to understanding the mechanisms of what is working and what is not working in the business interest.

Being associated with a startup firm myself, I can candidly share that it’s not a cake walk to set one up.

Startups embark on a journey on the basis of certain assumptions regarding the launch of their product or service in the market, and along the way they keep experimenting with various permutations and combinations to understand what is working and what is not.

One important thing to understand is that it is relatively easy to set up a business and handle it in the initial phase but, how to take it forward to the next level is the question.

Here, we have to understand the right target market fit for the business model because if one can get that right, then monetising the business is just a question of timing.

I firmly believe in primary market research, the more we reach out and get to know our target audience, their needs and requirements the easier it is to define the business strategy and product roadmap. Once we have the roadmap ready, the key is to identify the input and output metrics of the business and focus on driving the output metrics by carefully manoeuvring the input metrics.

Some business metrics that I closely follow in my daily routine are:

Customer Acquisition Cost

Customer Acquisition Cost (CAC) is a metric that matters the most if you are in the early stages of startup growth. If a startup wants to survive it needs users at a cost lower than the revenue/sales generated from them.

But, then, a lot of entrepreneurs fret over customer acquisition and forget all about customer retention. The easiest way of growing any business is to ensure low churn and retain its customers.

There are two kinds of customers to focus on:

  • Current: Find out what can you do to make your existing customers more satisfied?
  • Inactive: Customers who’ve stopped using the product or have not shown keen interest.

Revenue Run Rate

As you move forward on a growth trajectory, you need to start measuring how your business is scaling. Your revenue run rate measures how sales are developing over time, captures directional trends, picks up patterns (e.g. seasonality), and can help to ease out potential problems that you are likely to face.

ARPU (Average Revenue Per User)

ARPU is a measure of a customer’s average contribution to revenue. A rising level means you’re getting more sales from each customer and/or you have pricing power. And, even then we all know that some customers are more valuable than others!

So, to give extra attention to them, the sales figures and patterns need to be studied closely by breaking down channel and customer type. This will help to optimise your customer mix and boost your share of wallet.

Cash-flow: Financial Management Metrics

Burn rate: It is essential to stay on top of your burn rate (how much cash goes out the door every month) is critical.

Running out of cash is one the top most reasons for startups to fail.

It gives you a fair idea of how much time is left before you run out of money, how close you are to breaking even, and when you’ll start generating profits.

Gross margins: Your gross margins measure your operating profitability. Both the level and the trend are important. You should know what kind of gross margin is typical for your industry.

They will give a fair idea of how effective your management, sales, and customer teams are at driving the business, what stage of the curve your business is in, what operating levels you can use to drive growth, and how close you are to inflection points.

Employee happiness: Tracking employee satisfaction is an underrated metric at startups, but, in my view it’s a useful one.

Being able to model and communicate all possible future scenarios is essential for good management and growth. Finally, genuine entrepreneurs do not get carried away in the wake of competition quoting fake numbers and move forward with a clear focus on building an outstanding product.

Note: The views and opinions expressed are solely those of the author and does not necessarily reflect the views held by Inc42, its creators or employees. Inc42 is not responsible for the accuracy of any of the information supplied by guest bloggers.