Since data is the key driver of business activities, the exuberance of data can be misleading. Therefore every stakeholder needs to filter actionable and vain information to maintain a winning strategy.
Proper product metrics allow you to succeed in decision-making and growth. Different sorts of data are meant to explain versatile facets of business like marketing, user engagement & acquisition, and, of course, financial health. The latter is traditionally the most acute challenge, and every startup founder strives to make his or her product as profitable as possible. For this purpose, there are different business metrics to analyze and track the state of things. Let’s discover the most fundamental ones.
This metric displays how much money the product yields within a specified timeframe. Traditionally, companies leverage the monthly recurring revenue – MRR. It consists of all profits the product generates from customers and excludes any special fees or payments. Some entrepreneurs also split the metric into two categories: new and add-on. New MRR shows the revenue from newly acquired users only. Add-on category covers all additional purchases and revenue expansions related to existing users. Additionally, you can take advantage of the annual recurring revenue (ARR) to define the money flow per year.
How to measure
All startup metrics (read here the overview of propper metrics for 2019 ) rest on formulas, and product managers do not have to conduct specialized surveys or manipulations to get necessary data. That’s how it looks with MRR:
The X product has two paid options: BeginnerX for $5 and MediumX for $10 per month. There are 100 users that opted for BeginnerX and 20 users that purchased MediumX subscription.
MRR = 5X100 + 10X20 = $700.
Large-scale businesses and startups with multiple subscription options make use of the average MRR. It means that instead of calculating the revenue for each option, you need to define the average monthly fee and multiply it for the total number of users. However, this approach is quite inefficient for products with simpler pricing models, just like our example:
Average MRR = (5+10)/2 X (100+20) = $900
As you understand, the higher MRR is, the better. The ways to grow it include the acquisition of new users, minimization of free subscription options, upsells, and price raising. However, not all of them may be viable in specific conditions.
Customer acquisition cost
This metric answers the question of how much the company spent to get a new user. Customer acquisition cost (CAC) covers all expenses such as SEO, advertising, and miscellaneous marketing costs. Besides, the balance of revenue generated from one customer and expenses for his or her acquisition defines how profitable your product or business is. For example, if the expense to acquire one user is $5, and this user brings a return of the same $5, the product’s money-generating capacity needs an urgent update. Moreover, CAC allows you to analyze how efficient the current marketing strategy is and abandon some cost-based yet ineffective solutions.
How to measure
CAC formula is rather simple. Take all your marketing costs and divide it by the number of users you managed to get. For example, the X company spent $10,000 on customer acquisition activities and attracted 8,000 new users.
CAC = 10,000/8,000 = $1.25
Knowledge of costs spent on each customer is fundamental for startup sustainability in the long run.
Lifetime value or LTV is a metric showing the revenue obtained from an average customer within the lifetime of his or her relationship with the product. Companies use lifetime value to estimate the future net profit per customer.
LTV is linked together with CAC. Their ratio, namely LTV/CAC, is the indicator of product financial health. Thus, if your result is below three, it is time to commence changes in growth strategy.
How to measure
The simplest LTV formula requires such variables as the average revenue per user (ARPU), the difference between revenue and variable costs per user per month, and the churn rate. Here how it looks:
LTV = ARPU X Revenue-costs difference / churn rate
At the same time, to achieve more accurate results, the formula may mutate and include other variables like weighted average cost of capital, CAC, and others.
The good thing about LTV is that it is a model to rationalize marketing expenses. The bad thing is that this model is often misused and some entrepreneurs treat it as absolute metrics.
Most startups and consulting companies like Railsware widely leverage the mentioned metrics in their activities. However, depending on the type of business and goals, there is a plethora of other data to benefit from including CCR (customer conversion rate), ARPA/U (average revenue per account/user), ACV (annual contract value), and many more besides.