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Define growth metrics + Why use them
Metrics are the data that you need to measure and that have the most impact to advance your business towards its vision of success.
Once you know what your strategic goals are, you'll need metrics to analyze whether you're going in the right direction or not.
Mastering the understanding of growth metrics is vital to monitor the evolution of your business.
Here's why:
Making better decisions
Many entrepreneurs and business leaders follow their instincts when making decisions.
But these types of decisions are based on emotion, not objective reasoning.
By looking at real business data to inform your decision-making, you avoid biases that can lead you down the wrong path.
Data-based decision-making allows you to better choose options that promote the health of your business and its customers because you rely on data and facts rather than assumptions.
Track progress
LWhen you're trying to reach a destination you've never been to, it's helpful to have a map that shows where you're going and where you are along the way.
Business data acts like a map for your business. If you know you want to increase sales, the only way to be sure is to follow the right growth metrics.
This allows you to see the progress you are making and to make adjustments to reach your goals.
Solving problems
By setting up growth metrics and reports in your business, you can identify trends and identify a problem before it harms your business.
For example:
If you see sales falling slowly, you can find out why and fix problems before they affect your business profits.
Types of growth metrics
There are 2 types of growth metrics: qualitative and quantitative.
Qualitative metrics
In a company, these are generally interviews or feedback from customers.
That means talking to customers or prospects in a direct or indirect manner.
This feedback is difficult to gather and record. Nevertheless, the information provided is valuable.
Quantitative metrics
Those are the numbers.
They don't give you answers but help you ask better questions.
Beware of Vanity Metrics
Vanity metrics are metrics (data) that flatter the ego, they show a good image of your company or yourself but do not allow you to influence the performance of your growth: they are not actionable.
In contrast, there are so-called actionable metrics, which are those that will lead you to achieve your goals by making the right decisions.
But how do you understand which metric to use depending on the maturity of a company or the type of business model? This is what we are going to see thanks to the Lean Analytics approach.
Aligning your metrics with your current goals: the Lean Analytics approach
As we have just seen, the multiplicity of metrics sometimes leads to confusion, they can seem convoluted and unclear, both for beginning entrepreneurs and for experienced people.
We used the Lean Analytics model (book by Alistair Croll and Benjamin Yoskovitz) to break down and understand which metrics to use at the right time.
You can find this book in our dedicated section: The Business Book Selection
If you should only remember that 4 main points in this book, it would be the following:
- It is important to use pre-defined indicators to assess the growth of your business.
- All businesses go through 5 stages of development: empathy, adherence, virality, revenue and growth at scale.
- Each of the phases has specific metrics that need to be focused on.
- Startups are divided into 6 types of business models: E-Commerce, SaaS, Mobile Application, Marketplace, Media, UGC)
- Each startup has key metrics that need to be focused on depending on its business model and stage of maturity: these are the OMTM.
Let us now look at this last point concerning the OMTM.
OMTM: Metrics for each Business Model and each maturity
The basic idea of Lean Analytics is this: by knowing what type of business you are, and what stage you are in, you can monitor and optimize OMTM for your business at any time.
By repeating this process, you will overcome many of the all-too-common risks that businesses or development projects commit, you will avoid uncontrolled growth, and you will build a solid base of defined solutions that meet real market needs.
Let us now look in more detail at what maturity and the type of Business Model are in the OMTM definition.
How to determine your Business Model to define your OMTM?
Lean Analytics highlights the concept of metrics specific to each type of business.
Here are some examples of metrics by business model type:
- Transactional : purchases, additions to the basket, average basket value, average conversion rate, ROI, revenue per customer, customer acquisition cost, etc...
- SaaS : Conversion rate, revenue per customer, customer acquisition cost, ROI, K-factor, Virality, Attrition rate, Retention rate
- Mobile application : Number of downloads, Average rating, Percentage of active users, uninstallation rate
- Marketplace : Number of items available, growth in the number of buyers or sellers, conversion rate, number of transactions per buyer or seller
- Media : Number of people engaged, click rate per ad,
- UGC (User Generated Content): engagement rate, content creation by users, virality, content sharing
As we have indicated before, the specific OMTM also depends on the maturity stage of a company, a point that we will see right away.
READ MORE: What are OMTMs?
How to determine growth maturity to define your OMTM?
The figure below shows these steps of Lean analysis, as well as the “checkpoints” you need to go through to move on to the next phase.
We will now detail each of these stages to provide you with some clarification on what these different stages of maturity really are.
EMPATHY
At this point, you should focus on collecting quality information by interviewing people and conducting surveys.
Get inside the head of your target audience. Make sure you solve their problem, not yours.
It should be a problem that people are interested in and that they would pay you to solve. Keep developing your product.
MEMBERSHIP
At this point, you need to know if what you've created is solid and useful. Distribute them to users to find out more.
- Are they committed? You need to focus on The commitment And the retention.
- What makes users leave?
- What motivates them to stay?
- Observe active users to see how they use your product.
Don't just believe your hunches or signs. Get evidence that what you've created is being used in the right way.
If you are not attentive to all these points, people will not recommend you, you could remain anonymous or spend a fortune to compensate for attrition with paid purchases. These metrics should be monitored every day/week/month to better respond to customer demand in order to increase your retention rate.
VIRALITY
The focus now needs to be on user acquisition, the onboarding process, and growth. Learn what motivates users to share your product or service. Virality works with good products, but sometimes you need to give it a boost. Some businesses have discovered what motivates their users to share. You'll need to do the same and the K-factor or virality formula will tell you where you are at. If organic virality doesn't work well at first, try paid channels to make yourself known while always being careful to target profitable acquisition costs.
READ MORE: What is virality and the K factor?
INCOME
It's time to start thinking about the best way to monetize. By moving from one stage to the next, the parameters and goals have changed. At this point, you need to charge for your product or services. And the best thing to do is focus on customer lifetime value (CLTV) and acquisition cost (CAC). Find the most interesting and most important customer segments that are most controlled and manage acquisition costs.
GROWTH AT SCALE
You have a product or service that people want, and your users/customers are your brand promoters who spread positive word-of-mouth. It's time to expand your market through new verticals across the globe. You can invest the revenue earned in new acquisition channels. It's about quantifying your goals now and integrating yourself into a larger ecosystem.
Once we have seen all this: that is to say the maturity phases as well as the type of business model, let's see now what the list of specific OMTMs is.
List of OMTMs by business model and maturity
Here is an overview of the different OMTMs that you could find for your business depending on your stage of growth and your type of business model.
Of course, this list inspired by Lean Analytics is not exhaustive but get inspired by it for your business.
These OMTMs are used to fuel the growth of your North Star Metric, which I invite you to read the following article if you have not yet had time to do so: OMTM.
Once we have finally defined what our specific OMTM is, I suggest that you finally see the complete list of these metrics.
Here is a very interesting article on setting up your OMTM through Google Analytics: Find your OMTM using Google Analytics
List of common metrics by growth maturity
Now that you know your business model and the maturity of your business according to the Lean Analytics model, you are in a good position to choose the metrics that will help you move to each next stage of growth.
Below is the list of metrics to manage for your business:
For more details about OMTM, take the time to read this article: What is OMTM?
For more details about the NORTH STAR METRIC, take the time to read this article: What is the NORTH STAR METRIC?
Regarding all the other metrics, I now suggest that you review each of them, let's go!
Detailed review of metrics + Calculation formulas
Once you've identified your business model, it's time to measure the metrics that are most relevant to your business. Below is an explanation of the main metrics and how they can be calculated.
Burn Rate
The combustion rate is the degree to which a start-up burns (that is, uses) its cash flow. It is essentially a negative cash flow. Burn Rate monitoring is critical for any fledgling business, as it reflects the amount of cash required to operate the company.
Calculating the gross burn rate — During the month of January, company X spent €5,000 on employee salaries, €2,000 on office rent and €1,000 on marketing and sales activities. Start-up X therefore has a gross burn rate of €8,000 per month.
Net burn rate calculation— Company X has a total income of €3,000 per month and has a gross burn rate of €8,000 per month (according to the gross burn rate example above). Start-up X's net burn rate is €5,000 per month.
Cash Runway
Once the Burn Rate has been calculated, you can thus determine how much time is left before the company's cash is completely exhausted. This period is called “cash runway”.
Example: start-up X has cash income of €120,000 and a net burn rate of €5,000 per month, so it has 24 months (i.e. €120,000/€5,000) before running out of cash.
Runway calculation - the following formula can be used
Retention Rate
Retention rate is the rate at which a business retains customers for a given period of time. This is feedback on a startup's product, customer service, and pricing, as well as on the customer's enthusiasm for the product. The retention rate should be the priority for SaaS start-ups and start-ups with a subscription-based business model. It would be useless for a startup to spend a lot of time and money acquiring new customers and users, only to lose them after a short period of time.
Retention Rate calculation - The following formula can be used:
Subscription Churn
The unsubscription rate is the percentage of customers who choose to stop using your service for a given period of time. It is also known in the SaaS world under the name of churn rate. The calculation method is quite simple: for a given period, generally monthly, divide the number of customers/users who left you at the end of the period by the total number of users/customers at the beginning of the period.
The cancellation rate of subscriptions is closely linked to customer satisfaction. It is therefore not surprising that it is also the main factor in the loss of net revenue. We already addressed the issue of using Net Promoter Scores to monitor customer satisfaction in a previous article.
Active users (daily/monthly)
Active users provide valuable insight into how many users are interested in your product or service. It also serves as the basis for calculating other parameters (such as the retention rate).
This metric is typically measured as the number of daily active users (DAU) or monthly active users (MAU).
On the other hand, studying the number of “total users” is not very useful, because this metric does not reveal if these users are actually using the product or service and if you have good retention.
K factor
The K factor is an organic and free acquisition tool. It is fuelled either by the growth characteristics of your product/service, or by enthusiasm for your business. If you master both at the same time, you have a good chance of achieving organic growth.
K Factor Formula - The following formula can be used:
- i: the number of recommendations from your customers or users
- conv%: the conversion rate of these recommendations
For more details on Factor K as well as the formula for virality loops, I invite you to read this article: Understand everything about the K-Factor and Virality Loops
Virality
Les viral loops act on your CAC (Customer Acquisition Cost) thanks to your customers who are the main promoters of your brand: 100% free marketing.
They also reduce transit times in your sales tunnel customers through the power of recommendation. They act on social proof, which makes prospects much more likely to want to continue their buying journey with your brand or in using your services.
Virality Formula - it depends on the K factor but also on the duration of the creation of the viral loops:
Function parameters:
- Fixed period of time that you are analyzing = T
- Growth in the number of users over a defined period = U (t)
- Number of users with whom you start the process/or the first users you introduce into the viral engine = u (0)
- Number of recommendations sent by users or customers over a specified period = I
- Conversion rate for recommendations sent by users = conv%
- Viral factor K = I x conv%
- Time taken to complete viral cycles = CT
Cost of Good Sold (COGS)
Cost of goods sold (COGS), also known as cost of sales or cost of services, is the cost of producing your products or services. The cost of goods sold includes the direct expenditure on materials and labour that are required to produce each good or service sold.
COGS calculation - the following formula may be used:
COGS application example:
Let's say your business uses the calendar year to account for inventory. The initial inventory is recorded on 1 January and the final inventory on 31 December. Your business has an initial stock of €10,000, makes purchases worth €5,000 and ends up with a final stock of €4,000. Use the COGS formula.
COGS = 10 000€ + 5 000€ - 4 000€ = 11 000€
Recurring revenue (ARR/MRR)
Annual Recurring Revenue (ARR) or Monthly Recurring Revenue (MRR) generally applies to SaaS businesses or businesses with recurring revenue models (subscription). It reflects the average recurring revenue of a business on an annual or monthly or multi-year basis.
You can thus use the MRR or the ARR to forecast the income that a company can expect to generate over a given period of time. These metrics are also used by investors to assess the feasibility and profitability of a company that has significant development costs, such as start-ups. (example: rent, office space, salaries, and infrastructure costs, etc...)
ARR calculation - When using this metric, you should only consider the recurring (i.e. fixed and committed) revenue component and not the exceptional components. The following formula can be used:
MRR calculation — SaaS or subscription start-ups should use ARR instead of MRR because they generally offer annual contracts, not monthly contracts. The following formula can be used. In other words, it is in fact the sum of the income earned per month:
To make forecasts, ARR can be calculated as follows: ARR = MRR x 12.
Gross MRR Churn Rate
The gross monthly revenue loss rate is the percentage of your revenue that is lost by customers who no longer use your services/products or when changing plans (switching to a lower or free plan)
Gross MRR Churn Rate calculation - the following formula may be used:
Remember that your smaller customers are likely to change more frequently than your larger customers. Your small users may not be fully committed to your offering, are more financially sensitive, and are more likely to go bankrupt.
Because the rate of loss of gross revenue is lower than that of the average customer, it is generally lower than the churn rate.
Net Monthly Net Revenue Loss Rate (Net MRR Churn Rate)
The net monthly revenue loss rate is a critical indicator of the health of a SaaS business.
Net revenue loss is the percentage of revenue you lost from existing customers over a given period of time. To calculate net revenue loss, you need to divide the net revenue lost from existing customers during a period by the total revenue at the start of the period. Net revenue loss is the difference between revenue lost as a result of cancelling the subscription minus new revenue from existing customers (i.e. upselling).
Net MRR Churn Rate calculation - the following formula may be used:
Like all measures of loss, the loss of net income is a percentage; it benefits or suffers from compound interest, so that even small differences in the loss of net income lead to large differences in real earnings at the end of the quarter.
The net revenue cancellation rate can be confusing, as the positive numbers are unfavorable and the negative numbers are favorable. A sharply negative net revenue turnover rate means that a business's revenue would increase even if there were no new sales. If the net revenue loss rate is close to zero, it negates sales growth, so all growth should come from new customers. If the result is positive, the sales team works hard to fill a pierced bucket. `
Customer Acquisition Cost (CAC)
The CAC is the total cost that a business has to pay to get new customers or users. This corresponds to the sum of the marketing and sales investments required to convert new paying customers.
CAC calculation - the following formula may be used:
In reality, the CAC can be calculated more precisely thanks to its complete formula. We've detailed its importance, calculation methods, and everything you need to know in this article: What is the CAC?
This metric allows businesses to prioritize their budget and understand the profitability thresholds of their offer. Businesses should aim to reduce their CAC in order to maximize their profit per customer. But 95% of businesses are wrong in the actual calculation of their CAC.
ARPU
ARPU measures how much revenue you earn per user over a given period of time. Knowing your ARPU is critical not only to understanding customer value, but also to calculating other metrics like LTV. ARPU is generally measured monthly.
ARPU is an excellent measurement tool for monitoring growth. As you expand your cross-selling or upselling offerings to your existing customer base, ARPU increases accordingly. Score.
ARPU calculation - the following formula may be used:
LTV
The LTV calculation represents the average revenue you can expect to get from each customer.
LTV formula - the following formula may be used:
The LTV is calculated in terms of gross revenue, but does not take into account operating costs, these elements are nevertheless taken into account in the framework of the CLV that we will see right away.
READ MORE: Why is the LTV/CAC ratio important?
CLV
The LTV calculation represents the average profits you can expect to get from each customer.
Unlike LTV, this metric takes into account the actual margin earned by each customer (thus taking into account the total costs incurred to run the business).
CLV calculation - the following formula may be used:
As a reminder, the gross margin is calculated as follows: Gross Margin (%) = (Total Revenues — COGS) /Total Revenues). You can find a bit more details at the end of this article on the specifics of Gross Margin.
READ MORE: Understanding and Optimizing CLV
LTV:CAC
This ratio allows us to understand if the customer will bring us more money over their average lifespan than we spent to simply convert them. It is an ULTRA important indicator to determine the sustainability of a business.
Ratio calculation - As the name suggests, this is the simple division of LTV by the CAC:
If you want to go much further in understanding this ratio, I invite you to read this article: Why is the LTV:CAC ratio critical and how do you calculate it?
KING
In simple terms, return on investment (ROI) measures the amount of return on an investment, compared to the cost of the investment.
Return on investment is a key performance indicator used to determine the profitability of a purchase (or expense). Measuring your ROI is useful for determining your success over time and for eliminating assumptions from future investment decisions.
ROI calculation - Here is the formula used:
Essential metrics at any point in your growth
Compound monthly growth rate (CMGR)
The CMGR is the growth month by month over a given period, generally between 6 and 24 months. It can be used to determine growth in a variety of contexts - for example, user growth over a given period of time or revenue growth over a given period of time. It is important to note that the CMGR provides the average growth over a given period of time, although growth rates may vary from period to period.
CMGR calculation - the following formula may be used:
The formula that you can find on the CMGR web, commonly called Growth Rate, is as follows:
This formula is the calculation method as you can see remains totally the same.
Gross margin
Gross margin is a revenue factor, that is, what is left after deducting fixed costs (For example: development or production costs, employee salaries if we are talking about consulting companies, etc.)
It is normal for the gross margin to be low in early-stage start-ups, as they are not yet in a position to take advantage of economies of scale. However, this gross margin must increase once new customers or users are obtained. (Ex: if you have obtained €10,000 in development costs for an application, the 1st user will always be proportionally more expensive than the 100,000th)
Gross Margin Calculation — The gross margin will be expressed as a percentage. A high percentage means that the startup is able to generate significant revenue for the cost it incurs for the goods sold. The following formula can be used:
