In today's article, we'll discuss what metrics are and their importance. Not all metrics are equally important for every startup. Depending on the business model, we should carry out more exhaustive monitoring of one or the other.

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The right importance of metrics

For the Founders For a startup, it is essential to know in depth the metrics or KPIs (Key Performance Indicators) of their business. If a metric is constructed correctly, it provides management, and investors, with knowledge about the exact state of the company, unaffected by emotion or rhetoric.

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But beware of focusing exclusively on metrics... as in everything, extremes are bad. Jerry Muller, author of the book “The Tyranny of Metrics”, argues that metrics cannot replace personal experience and talent and that rewards associated with measurable objectives are not always the most effective ways to motivate people. And at Intelectium we couldn't agree more with this. Metrics are important, but they are no substitute for holistic management that must be based both on the control of certain data and on the subjective perception of the whole, provided by a highly experienced manager. We recognize that the latter may sound vague, but we must not underestimate the mind of the “expert”, who, based on years of study and experimentation (if you are interested in this topic, we recommend reading “Talent is Overrated” by Geoff Colvin) is able to store and collect a multitude of data at key moments, as evidenced by studies carried out on the great masters of chess.

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What are the basic metrics for a startup?

Back to our business, the best way to identify and track metrics is (Evers, Cunningham & Hoholm, 2014):

• Rigorously defining what type of metrics are most useful for each company in the phase it is in.
• Finding reliable ways to test and measure progress
• Breaking numbers down into smaller, more significant units.

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According to Intelectium's experience, and simplifying a lot, the 10 main metrics that every startup should follow, at a minimum, are:

1. Sales

Depending on the business model, there are many different ways to measure, and also to account for, sales. While in an Enterprise-type business model (selling software or services to large companies) what is important is the number of contracts signed, the “bookings” and the sales themselves, in a SaaS business model sales are more measured in terms of MRR and ARR. In a Marketplace-type model, sales are measured in two formats, the Gross Merchandise Value (GMV), which is the total value of sales, even though the company only charges a sales commission, and obviously those commissions that constitute the company's real net income.

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2. Gross Margin

Gross margin is one of the most important metrics a company can have and its size is one of the most significant values to describe its success or failure. Gross margin is defined as the difference between net sales (that is, having removed discounts that could be granted for different concepts to customers, such as prompt payment, or returns) and variable and fixed costs attributable to production, including what is known as “full cost”, which includes the direct, variable and fixed costs of manufacturing a product, as well as an adequate part of the indirect costs. Distribution costs and sales costs are not included here.

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3. MRR (Monthly Recurring Revenue) and ARR (Annual Recurring Revenue)

MRR, a sales measure widely used in SaaS business models, is not generally accepted as a valid sales accounting measure by American GAAP. However, its use is very practical, it is very widespread and is defined as the sum of all new subscriptions and upgrades (hiring new features or more users by the same customer, for example), minus downgrades (or contractions) and canceled subscriptions. The ARR is simply the MRR multiplied by 12.

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4. CLV (Customer Lifetime Value)

It is the value that a customer generates throughout their life with the company. It is calculated by multiplying the average ticket (net turnover between the number of orders) by the gross margin left by the product, the number of times the average customer buys in the year, by the average number of years that he is a customer. If you know how much money is earned per customer, you can know how much money to invest in acquiring a new customer. An important point to consider is whether we should use sales, contribution margin or gross margin for our calculation. In short, the answer depends on what we want to measure... Our recommendation is to use gross margin, defined as indicated above.

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5. CAC (Customer Acquisition Cost)

It is an indicator of how much it costs us to attract, on average, a new customer. The calculation is done by dividing the total cost of marketing and sales by the number of customers acquired in a given time. When you enter the market, your CAC may be high, but as you understand your ideal customer, find your most effective marketing channel and get referrals from your first users, your CAC should tend to decrease.

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6. Churn Rate (Abandonment Rate)

It indicates the percentage of customers who have stopped buying or who, after making a first subscription to a service, do not renew it. It provides an indication of customer satisfaction and obviously the goal is to keep it as low as possible. This metric is important for companies with a subscription model and B2B companies.

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7. Customer Retention Rate

It is the rate that measures customer retention over a period of time in the company. It's the opposite of Churn Rate. Indicate the percentage of paying customers that were retained in the company. High retention may mean that you are offering high added value to your customers and that they are happy with your product or service, but it could also be that the switching costs are very high and even if they are not 100% satisfied, they consider that it would be worse to stop buying from you. It acts as feedback for a startup's product, customer service and pricing, as well as the customer's enthusiasm for the product.

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8. Cash flow

It consists of simply measuring the money that enters the startup versus the money that comes out of it, without introducing accounting effects in between (such as amortizations). Positive cash flow indicates that more money comes into the company than comes out of it. It is very important to have good control of this indicator, since it helps entrepreneurs to project future cash needs and to calculate when it is more ideal to prepare for a next round of investment or to attract more public aid.

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9. Burn Rate

It refers to the speed at which a company burns or uses its cash reserves. It is essential to control it, especially in the initial stages of a startup, since one of the most common reasons why startups fail is because they run out of cash (Ehrenberg, 2014). It's also an important metric for investors.

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10. ROI - Return on Investment

This metric is used to calculate profits or losses derived from an investment. To calculate the ROI, divide the profits or losses by the total invested and multiply the result by 100 to obtain the ROI in percentage.

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Key metrics depending on the business model//How do you know what metrics your startup should follow?

To start identifying the most important metrics for your startup, these will depend on your business model. The way in which you charge your users will define which metrics are most important to your startup (Medium, 2020). Below, we explain the most common business models and the basic metrics of each of them.

Enterprise model (selling software or services to large companies)

This traditional business model starts from the use of metrics as basic as sales, but to track a business of these characteristics, it is also important to measure the value of contracts with customers and “bookings”. The complexity derives from the difference between sales and bookings, which is very unique because it also affects eCommerce businesses where the products or services are not used immediately, as can happen in the sale of tourist packages, where hotel reservations occur today but not the supplier does not pay them or recognize them as sales until the customer has made use of the services, in this case the lodging.

In this model, the key metrics to measure are:

• Net Sales
• Bookings
• Gross Margin
• CLV
• CAC
• Paid and Blended (CAC)
• Churn Rate

SaaS model

The software as a service (SaaS) model allows the delivery of software, which is hosted externally through the cloud, on a recurring subscription basis. Customers who subscribe to these services can access the software through a web browser, a mobile application, or by downloading the software to their devices. This model is not based on closing a single deal, but the strategy that drives SaaS startups is to create and offer highly innovative solutions that promote long-term relationships with diverse customers.

The most relevant metrics you should measure are:

• MRR
• ARR
• CAC
• Paid and Blended
• CLV
• Churn Rate

eCommerce model

E-commerce involves selling products through online channels. It is usually a B2C (business to consumer) business, but we also find it in B2B (business to business) mode. Startups that use this model make or buy products that they then sell to consumers.

The most relevant metrics you should measure are:

• Net Sales
• Gross margin
• CAC
• CMGR
• Monthly compound sales growth rate
• Number of Customers
• Number of Orders
• Orders by Customer
• CLV

Marketplace model

They are platforms made up of two different types of “customers”: buyers and sellers. Many startups define “customers” as those who are on the demand side and “users” as those who are on the supply side. The startup acts as a facilitator of the transaction of a good or service between both groups. Monetization is measured by capturing a percentage of the transaction value.

The most relevant metrics you should measure are:

• GMV
• Net Fees
• CAC
• CMGR
• Monthly compound sales growth rate
• Retention rate (in this case for both customers and users)
• Number of Customers and Users
• Transaction costs
• Total cost of marketing and sales

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And as we said in the introduction, these or other metrics are not everything in the good management of a company, so despite the importance of measuring them and monitoring their evolution in detail, then we must identify the causes that generate positive or negative developments in them, and enhance the former and resolve the latter, using the expertise and experience of the management team.

Read more: What are the main business models?