Critical metrics for each stage of startup growth

Posted by Lars Lofgren

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Early days of a Startup - Document

 

Metrics enable a company to measure how it is doing. They can be used to set targets/milestones, demonstrate progress to investors, and identify the core problems you need to solve to get your business to the next level (and therefore how to prioritise your time).

But what are the right metrics?

For a startup business, there are a few core metrics that need your undivided attention. And the priority of these metrics shift as you grow. If you’ve only had paying customers for 2 months, it doesn’t make much sense to track lifetime value. But later on, lifetime value is essential.

Each stage of startup development has two metrics that balance each other. Together they keep you from over-optimizing one metric and unintentionally harming the long-term health of your business.

Stage 1: Before Product/Market Fit

You have just made the decision to start your business and have plans for world domination. But before you can start building your empire, you need to make sure you have the right product for the right market.

For most new products, there is usually a disconnect at the beginning and customers don’t quite want what you have. Either you need to go after a different target market or you need to change your product to fit their needs. When you get this match right, we call it product/market fit.

You’re probably at this stage if:

- You’ve just started
- You don’t know who your ideal customer is
- People are trying your product for the first time

[AlumniStartups note: for a detailed discussion on product/market fit, refer to the Learnings post ‘Key to Startup Success: Product/Market Fit’]

But how do you measure progress when you don’t have any data? You don’t even have any paying customers at this point and if you do, it’s not many.

Metric #1: Qualitative Feedback

At this stage, you have really only one goal: build the right product for the right market. And the fastest way to do this is to start talking to your customers. Doing so provides you with the only real data you will have at this stage: feedback.

For a SaaS business this looks like:

If you have any users at this point, jump on Skype and get a deep understanding of their main problems. Ask them to show you how they currently solve the problem you’re going after. Then show them what you’ve been working on to see if they get excited about it. Usually, you’ll want to follow this format for the interview:

- Basic demographic questions to get a better sense for who you’re talking to
- Deep questions about the current problem
- Present your solution for feedback (don’t sell it, just get feedback)

You’ll want to do 10-20 of these customer interviews

If you don’t have any users at this point, go and talk to people that you think would want to use your product. This is a great way to start testing different target markets efficiently. It’s a lot easier to schedule 10 more Skype meetings than it is to rebuild or rebrand your product.

When you want to start scaling feedback (especially as you move into the later stages of your business), use Qualaroo surveys, SurveyMonkey, feedback forms, and usability tests like UserTesting.com. But when you’re just starting, talk to people in your target market one-on-one. The insights will always be much better.

Metric #2: Measuring Product/Market Fit

There’s just one little problem with all this customer feedback: it is difficult to measure objectively. Are people REALLY interested in our product or are we only focusing on the positive feedback while downplaying the negative feedback?

Luckily, there is a survey question that will help you quantify whether or not you’ve reached product/market fit. Here it is:

How would you feel if you could no longer use [product]?

- Very disappointed
- Somewhat disappointed
- Not disappointed (it isn’t really that useful)
- N/A – I no longer use the product

Send this to people that have used your product recently. The goal is to get at least 40% of your users to say “very disappointed.”

If you don’t meet the 40% benchmark, you may need to reposition your product or pivot entirely. If you do hit it, time to move on to the next stage.

Stage 2: Beginning to Scale

So you have found product/market fit. You have revenue coming in and a growing customer base. Now it’s time to build a business.

You’re probably in this stage if:

- You’ve found at least one way to acquire customers consistently
- Many of your clients are repeat customers
- Your monthly revenue is starting to grow

Up until this point, you didn’t really need to track much. Outside of basic customer signups and revenue, there wasn’t anything to track. Now that you have the right product for the right market, there are two metrics that will keep you headed in the right direction.

Metric #1: Recurring Revenue

Recurring revenue focusses your team on the customers that are most important to the growth of most businesses – long term repeat clients.

For a SaaS business, monthly recurring revenue is the right metric to track. It’s the total revenue you received during the month that came from recurring subscriptions.

The health of a SaaS business heavily depends on recurring revenue. It can take months to regain the cost of acquiring a customer and the real profits come from increasing that subscription revenue. One-time windfalls just aren’t that valuable. By tracking monthly recurring revenue, you can see exactly how your business is doing month-to-month.

Metric #2: Churn Rate

Recurring revenue is one side of the coin at this stage. The other side is churn. If you can’t keep customers, it won’t be long before your recurring revenue won’t budge and your business will stall.

The thing is, churn can be a devious metric. At the beginning, for a SaaS business, a monthly churn rate of 10% doesn’t seem so bad. If you have 100 customers, 10 of them left. Not that big a deal right? It’s pretty easy to get 10 more customers. But what happens when you have 10,000 customers? Now 1,000 of them leave in a single month. Even the best marketing machines have a hard time keeping up with something like that.

Your churn rate starts out innocent and easy to handle. But it can quickly get out of control if you’re not keeping a close eye on it. In order to build a strong foundation that will help your company grow over the long-term, you absolutely, without a doubt, NEED to get control of your churn rate.

So what’s a good churn?

It always varies by industry. But in general for a SaaS business, it’s critical that you get your monthly churn under 5% and your goal should be 1-2%. If your monthly churn is above 5%, ignore everything else until you lower it. Later on, you can experiment with upsells and cross-sells to get negative churn.

Stage 3: Expansion

Sooner or later, you are going to hit a wall: the main channel you’ve been using to acquire customers will start to slow down and you’ll hit diminishing returns. If you want to keep growing each month, you’ll need to find new sources of growth.

You’re probably in this stage if:

- Growth is beginning to slow for the first time
- Continuing to improve your main channel is getting a lot harder
- You’ve successfully controlled your churn

You might start testing affiliate programs, new ad networks, PR, business development, referral programs, new types of content marketing, conferences, event marketing, or whatever type of marketing happens to be hot at the moment. You have LOTS of options to choose from. Some of them will be a great fit for your market, others will fail completely.

As you start to experiment with new channels of growth, you need to focus heavily on two metrics. These metrics will keep your experiments in check and make sure you scale profitable channels.

Metric #1: Lifetime Value (LTV)

How much revenue do you earn in total from a customer before they leave your business? For a SaaS business, it’s absolutely critical to track lifetime value. When you factor in acquisition, support, and product costs, it can take a SaaS businesses 6 to 12 months to turn a profit on a customer.

To make sure customers stay long enough to keep your business healthy, we use lifetime value (some people abbreviate it as CLV or LCV).

By now, you’ll have had customers long enough so that you can actually figure out your LTV.

Metric #2: Cost Per Acquisition (CPA)

As you begin to experiment with new channels to keep growing, cost per acquisition keeps things in check. It’s the total cost it takes to acquire a customer from a particular source.

For the average CPA of your business, you can total up your entire marketing and sales expenses over a month then average that out over the total customers you acquired. But you need to take it a step further and segment CPA by acquisition channel. This tells us whether or not customers from new channels are worth the effort.

When you’re experimenting with new channels, it’ll usually be pretty obvious if the math won’t work out. Bad channels tend to be BAD channels. So keep experimenting until you find the ones that work.

Not only will CPA help you evaluate new channels for growth, it’ll help you figure out how far to push your main channels. How much can you actually spend to acquire a customer on AdWords or Facebook before it becomes uneconomic? How many writers can you afford to hire to put together content? By keeping an eye on these metrics, you’ll know how far is too far.

A popular rule of thumb for SaaS businesses is to keep CPA to one third of your LTV. And a customer should become profitable within 12 months.

Once you have mastered Stage 3, you have moved beyond being a Startup and can begin to use conventional business metrics.

Keep in mind that each stage is not completely exclusive. Let’s say that you’ve found product/market fit and are starting to scale. If you are using AdWords to acquire customers, you will definitely want to keep an eye on my cost per acquisition. But at this point, you are still trying to get a handle on your churn for the first time. You won’t REALLY know how long these customers are going to stick around. So check your CPA to make sure it’s somewhat reasonable (if the total revenue from a 12-month subscriber doesn’t cover it, you have a problem). Otherwise, spend most of your time improving recurring revenue and churn.

By all means, track the other metrics you need. But the above metrics are the bare minimum. Move mountains to track them before worrying about the rest.

Summary

For each stage of your business, track these metrics:

Before Product/Market Fit: Customer feedback and the product/market fit (as measured by customer disappointment if you were to withdraw your product)

Beginning to Scale: Recurring revenue and churn

Expansion: Customer lifetime value and cost per acquisition

 

This is a summary of the original article by Lars Lofgren (product marketer at KISSmetrics) found at http://andrewchen.co/the-critical-metrics-for-each-stage-of-your-saas-business-guest-post-by-lars-lofgren-of-kissmetrics/. Note that Lars originally wrote with reference to Software as a Service (SaaS) businesses, but we believe that the same metrics are applicable to startups in most sectors.