Startup financial metrics: the ones for the early days.
Startup financial metrics are often over-discussed and misemployed.
I like to think that over-discussion is basically due to their importance. In fact, when we talk about ventures with unusual business models, having monitored the two/three indicators which describe how the business is performing with respect to the main leaps of faith is crucial.
Take as an example a subscription box business, one of those sending you a crazy selection of stuff every month. When you launch it, you want to have monitored whether the prospects find the proposition compelling to their needs and how many of them are enough satisfied to renew the subscription.
What you need to monitor in these very early days much depends on the business you’re running. Probably, the metrics at this stage are not so financially meaningful, while they’re more “business metrics”.
But when the business is growing, there’s a layer of leaps of faith common to every DTC business operating on the web, because the survival challenge is the same: exploiting the value provided by the average customer more than how much the customer cost.
Basic performance indicators
Before going into the financial metrics which matter when the business is growing, I want to raise a point about startup financial metrics vs. performance indicators.
Startup financial metrics should describe specific financial performances.
Said that, it comes by itself that the CTR of the organic traffic is not a financial metric. While the average CTR combined with the average cost of writing the blog post to be ranked can provide some financially useful information.
Given this incipit, I can now go through the startup financial metrics which matter.
As said, when the business is growing, the survival challenge consists in exploiting the value provided by the average customer more than how much the customer cost.
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Startup financial metrics served
So, if the key point to growing sustainably is to exploit the value provided by the average customer more than how much the customer cost, there is the need for a metric describing such dynamics.
To build up such a metric, which should be used by any post-revenue startup, there are two basic performance indicators to retrieve first.
The first is the Customer Acquisition Cost (CAC), hence the cost to acquire a new customer. The second is the Customer Lifetime Value (LTV), hence the economic value of a customer during his whole period as such.
With the two indicators available, the key metrics can be finally built as LTV – CAC. This metric describes whether there’s value for the business from acquiring a new customer after exploiting entirely its value.
If there’s economic value left, there’s room for growing sustainably.
Coming back to the subscription box example, if the CAC is 20, the average margin from one box 5 and the average customer keep subscribed for 5 boxes, then the LTV is 25 and the LTV – CAC is 5.
Even though there’s room for sustainable growth, it is not enough to stick to the LTV - CAC metric, for two reasons:
- The economic value left may not be enough to auto-finance all the other costs of the business;
- The LTV may be exploited in the long run and therefore is not able to finance the CAC in the short term.
The answer to the first point can be found within a business plan where all the business costs are assumed, from HR to the tech stack and office rental. While the second point can be addressed by calculating the CAC payback period.
The CAC payback period is a metric describing the time it takes for your investments in marketing and communication to acquire a new customer (CAC) to be paid back.
The greater the CAC payback and the greater the money you need to be put in advance into the marketing and communication plan to be run.
CAC payback periods smaller than one means that you can boost the acquisition of new customers since they back the investment with the first purchase.
To come up with an example, this is exactly the case when the CAC is 20 and the margin of the sale is 25. The cost to acquire the new customer is fully recovered and immediately ready to be employed in a new acquisition.
Additional useful resources
To go deeper into the metrics above, here you can find previous articles covering related topics.
- Things do not always go straight as expected. You should always be ready to cope with a scenario which is not the one expected. Here you can learn how to do it, by extending the LTV – CAC metric with the related resilience.
- You may have read all around the web that the key growth metric to monitor is the LTV/CAC and you may be asking yourself why it is not featured here. You can find the reason in this article where I compared the meaning of LTV – CAC and LTV/CAC.
You may find around zioube other pieces of content extending some of the concepts I covered here. The two ones I’m suggesting you are the ones I feel most useful at the time of writing if you enjoyed this article.