When you’re starting a company you may get lost in the alphabet soup of metrics of things you can be measuring CAC, LTV, ARR, Churn, and many others. Company metrics matter but focusing on the wrong metrics at the wrong stage of growth can lead you down the wrong path.
I’m going to go over three things:
- Common startup metrics and basics
- Pirate Metrics and the AARRR framework
- Early metrics vs. Later stage startup metrics
There are a lot of startup metrics that are used and they often use TLA’s or Three Letter Acronyms. These can be confusing for first time entrepreneurs but they are all trying to measure how you’re engaging with customers. Investors like these metrics because they create a common framework for discussing companies across company size and across different industries and even comparing yourself to public companies.
The most common metrics allow you to track customers through sales funnel. Visitors come into your sales funnel on one end and if you’ve done your job right, they become customers on the other end. Obviously not everyone who comes to your website becomes a customer and this is called your conversion rate.
Now there are a lot of ways to get people to even visit your company or website in the first place. A common way is to spend money on advertising or promotions. If you run ads or promotions you can figure out your Customer Acquisition Cost or CAC. The CAC is how much you have to spend to get someone all the way through your sales funnel.
Once a customer is through your sales funnel they are likely to pay for your product or service. Some purchases are one-time purchases but for many businesses, especially in software you’re likely to get paid either monthly or annually. If you add up your recurring revenue on a monthly basis you’ll get your Monthly Recurring Revenue or MRR. As your startup grows and matures you’ll also be looking at your Annual Recurring Revenue or ARR… and if you project that forward to the duration of a typical customer you can calculate the LTV or “Lifetime Value” of a customer.
So great… You’ve gotten someone to sign-up for your product or service. Now the key is how you’re going to keep them engaged. This is what’s often called Churn. The Churn of a startup is what percentage of their customers quit the service over the last 12 months. As an example, Netflix is estimated to have a 9% churn rate. That means that 91% of customers from last year are still customers today. Every startup can start to calculate the churn rate and this is a good indicator of how much people like your startup or service. If you have a really low Churn rate people are likely to stick around… and spending more money on Customer Acquisition is likely to make you more money in return. However if your Churn rate is really High and people sign-up but then abandon, this is what’s called a Leaky Bucket. You’re getting customers through your funnel but you’re not keeping them around.
A good way to think about this is using Pirate Startup Metrics.
AARRR Framework – pirate metrics for startups
Dave McClure came up with the idea of Pirate Metrics and it’s just a framework to think about that sales funnel in a little bit depth.
It’s called Pirate Metrics because it spells the word AARRR. Let’s go through the letters…
Acquisition – getting people into your startup funnel. You want to explore many channels and figure out what works.
Activation – Ok you got someone to sign-up but are they using the service? Did you onboard them and get them to do something that will create value?
Retention – Do they come back? Are people coming back to your service? Do they sign-up and then forget about it or are they using the product or service on a regular basis?
Referral – Do they like the service enough to tell others? If each person who uses your service refers others this gives you a viral coefficient. And if you know your CAC (customer acquisition cost) you can even incentivize these referrals.
Revenue – Revenue, can you make money from your fanbase?
Using the AARRR framework makes it easy to remember the sales funnel and it can help you prioritize some of the metrics that you should be tracking. Each of these metrics is important but each has a time and a place in the life of your startup.
Early metrics vs. Later stage startup metrics
In the early stages of a startup it’s important to find “Product Market Fit” this tends to put a higher focus on Retention and Revenue. Your startup may not be super-efficient at either finding customers or activating them and you may find that you need to hand-hold initial customers through onboarding and setup.
But once you have customers are sticking around and using the service repeatedly then it’s important to start automating more of the funnel.
As your business gets more sophisticated you can track more complex metrics but don’t overcomplicate things too early. It doesn’t make sense to optimize some of the more complex metrics if you can’t figure out the basics.
When it comes to metrics, it’s important that your team knows what’s important. Pick ONE core metric that you want to track as your North Star and make sure that everyone on the team knows what that metric is. Creating team visibility on that metric helps everyone focus and make progress. Your one metric can change over time, just make sure your team knows what matters.
Startup metrics help you grow and focus on the right elements to ensure your startup isn’t just surviving but thriving. A full spectrum view of your own metrics gives you a birds eye view, and a narrow focus for your team allows for alignment and team progress.