You can’t change what you don’t measure. Building a high growth startup requires exceptional ability to manage change. Here are three important growth metrics to keep an eye on in the early stage of your startup.
Many of these metrics can be very helpful provided they’re examined in context. You can measure things like revenue per customer, shopping cart abandonment, traffic, burn rate, retention etc. However, you can’t measure everything at once because too much data diverts your focus and leads to a case of “analysis paralysis”.
Different metrics are relevant for different business models (i.e freemium, SaaS, e-commerce), different stages of product lifecycle, and a startup’s many stages. In the very early stage your goal should be to determine to the following:
- You’re on the right track in terms of traction
- You’re building the right product
- You’re building an actual business i.e. it will make money
In other words – growth, product, profitability.
Weekly Revenue Growth
In his great post Startup = Growth, Paul Graham defines a startup as “a company designed to grow fast”. Based on this definition if there’s one number a founder should always know, it’s the company’s growth rate. Typically, the early stage growth rates of startups that made it to IPO are as high as 10% per week. This obviously slows down with time, but the higher your weekly growth the better prospects you have.
The best measure of weekly growth is revenue. The second best (for startups without a clear monetization model) is the user base growth. According to Y Combinator, a good growth rate during YC is 5-7% a week. If you can hit 10% a week you’re doing exceptionally well. If you can only manage 1%, it’s a sign you haven’t yet figured out what you’re doing. Every percentage makes a huge difference over the long term. For illustration see following table:
Y Combinator advises startups to pick a growth rate they think they can hit, and then just try to hit it every week. If they decide to grow at 7% a week and they hit that number, they’re successful for that week. There’s nothing more they need to do, according to Graham. The great thing about having growth rate as key metric is that it is simple and powerful – whatever decision you have to do if it gets you closer to your target growth rate, it should be done and vice versa.
Net Promoter Score (NPS)
The key differentiator of fastest growing companies like Twitter, Groupon or Instagram is that they build products that are viral and highly engaging. A viral product results into exponential growth without a need to spend on marketing (did you ever see an ad promoting Facebook?). Engagement leads to long term value – the longer your customers stay around the more likely they are to become long term customers. To stress how important this is just consider the fact that there are 1.2 million apps in Apple’s App Store yet on average we only use seven apps on a daily basis. That’s why a vast majority of apps aren’t profitable.
Aside from growth you have to make sure you have product/market fit. Or in other words, does the product you’re building satisfy customer needs. NPS is one single metric that best determines whether your customers are engaged and happy with you. It’s also the best indicator of virality.
Net promoter score was invented by Bain & Company, who after conducting a research into “millions” of variables, found that the only statistically reliable metric determining the upward or downward trajectory of a company is this single question:“How likely are you to recommend this company to your friends?”
- To measure your NPS you can run a survey either via email or on-site using a tool like Qualaroo. The question is “How likely are you to recommend this company to your friends?” – to get responses provide a scale of 1 to 10.
- Once you start getting responses divide them into three categories: promoters, detractors, and others.
- Promoters are those who chose 9 or 10 on the “likely to recommend scale” and detractors are those who chose any number between 0-6.
- Figure out the percentage of respondents that fall into the promoter and detractor buckets. Subtract your detractor percentage from your promoter percentage and the result is your NPS score.
- To get some qualitative data, consider adding another question: “What’s the most important reason for your score”.
Lifetime Value of Customer / Customer Acquisition Cost (LTV/CAC)
Another definition of a startup comes from Steve Blank – “a startup is a temporary organization designed to search for a repeatable and scalable business model”. Scalable business model is the point where you figure out a way to sustainably make money. It basically means you must acquire customers for less than the revenue they generate.
According to a startup genome report, an analysis of data from over 100,000 startups around the globe, the number one startup killer is premature scaling. Premature scaling is growing faster than you can afford to, or in other words before you find a repeatable and scalable business model.
According to VC David Skok (at least for SaaS business) you have found a repeatable and scalable business model when you make a revenue per customer that is three times higher than it costs you to acquire that customer. In order to reach a repeatable and scalable business model you must first nail the problem/solution fit and product market fit.
This article originally appeared on Appster’s blog.
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