As an entrepreneur, you are probably breathing metrics every single day; and why shouldn’t you? After all, they literally define the health of your business.
It is imperative that you take the time and gauge through these critical data points that delineate and monitor the success of your start-up. Believe me, they are probably more important than running after the right talent or chasing funding.
Of the several metrics that are out there, here are my top 8 that I believe you shouldn’t ignore.
- Monthly Recurring Revenue (MRR) or monthly total of paid customer fees
It’s the most important one, especially if your business is of the subscription model. Your customer pays you a certain amount month on month for a fixed period of time – something like a retainer. It’s a predictable revenue which you can count on every month.
In this case, the challenge is in ensuring that the customer sticks with you and gets no reason to go elsewhere, making retention top priority.
Brands working with MRR: Netflix, Grammarly, Tinder
- Annual Recurring Revenue (ARR) or recurring revenue on an annual basis
ARR is the go-to metric for measuring your company’s momentum and helping in forecasts, renewals, retaining critical talent and even attracting investors.
Again, part of the subscription economy, it thrives on relationship building rather than conventional sales and is a fairly accurate way to predict how your associations with your customers really are and how much can you actually count on their business.
Brands working with ARR: Amazon Prime, Adobe, GoDaddy, Microsoft Office
- Average Revenue per Account (ARPA) or MRR divided by the total number of customers
ARPA offers insight on your company’s revenue generation and growth at the individual unit level. It is also a useful tool for investors to compare and identify which products are working and which are not.
My advice is to not measure all your customers with the same metric – have a separate one for your new customers and existing ones. It will be more insightful once you see how much new business you have acquired and how many existing clienteles you have managed to retain.
- Gross Profit or total revenue minus the cost of goods sold
The ‘Cost of Goods Sold’ (COGS) is primarily the cost your company has incurred in creating the product – manufacturing cost, manpower cost, etc. If you do not deal with physical products, it could be say, the cost of hosting your website, the cost of the talent managing the service etc.
Determining COGS are certainly a bit complicated but I’m sure a good financial advisor can help you with this.
Coming to Gross Profit, this metric is very simply, your Total Revenue minus COGS, thus giving you a clear picture of how much your profit margins really are.
- Total Contract Value (TCV) or value of one-time and recurring charges
This metric is the total value of the contract, irrespective of the duration, and includes variables like one-time charges, professional service fees, and recurring charges.
TCV helps in projecting your booking value, planning revenue or tracking growth of your start-up
- Annual Contract Value (ACV) or value of a contract over a year
This is the value of a particular contract or customer business for 12 months. It is usually an average spread over a year, irrespective of the actual period of the contract.
The average is what will help you gain insights on the magnitude of business you are doing over a year. Are you getting customers paying small amounts each month or are you able to tap into the big fish?
This is the metric that you should focus on growing year on year.
- Lifetime Value (LTV) or prediction of the net profit from the entire future relationship with a customer
It is, in short, the total profit you can expect to generate from a customer from the entire time that they are associated with your business.
Industry veterans believe that this is literally the only metric that matters. LTV offers insights into your customers, pointing out who is in for the long-term and who isn’t.
Customer retention plays an important part in ensuring high LTV. Loyalty is something that you build on and then bank on it to generate a steady stream of revenue and consequently, a higher profit potential.
Never forget, acquisition of new customers always costs a lot more than retaining your existing ones.
- Deferred Revenue or amount that was received by a company in advance of earning it
The most important thing to remember here is that Deferred Revenue is classified as a liability and not as an asset in your company’s balance sheet.
In plain language, it is the money you have received for services you are yet to deliver.
Examples include advances taken by event management companies to execute the job since they have to pay other suppliers too, software subscriptions which are usually for a longer period of time, advances taken by real estate companies before the construction is actually finished.
Brands working with Deferred Revenue: Airbnb, Sirf Coffee (dating service)
In summation, metrics are the Key Performance Indicators (KPI) of your start-up that can help you in strategic planning and making informed decisions.
Yet, it is not uncommon for our eyes to glaze up in boredom every time these heavy words are thrown about. I totally understand that as a budding business tycoon, you probably have enough on your plate, but I would strongly recommend that you do not ignore or procrastinate their tracking.
Also, instead of calculating each and every metric you have heard of, pick only a few, ones most relevant to your business and track them diligently. Spend more time with these metrics instead of pouring over heaps of Excel sheets and achieving nothing.
I leave you with this quote from an article I read in Forbes which said, “Ultimately, though, good metrics aren’t about raising money from VCs — they’re about running the business in a way where founders know how and why certain things are working (or not) …and can address or adjust accordingly.”