When setting goals for your startup, make them SMART: specific, measurable, attainable, relevant, and time-bound. Measurement is key — you should be able to quantitatively measure progress toward a goal. Measurable goals remove the guesswork from the strategic planning process. You can objectively evaluate what you measure and make informed decisions. But what goals should you measure, and how can you measure them?
Let’s dive into understanding which goals to measure for your startup.
- Assigning metrics to goals provides concrete evidence of progress
- Reverse-engineer your goal to create actionable tactics and processes
- Choose the right metrics to effectively measure your startup’s goals
Assigning Numbers and Metrics
You must be able to measure a goal to provide concrete evidence of progress. The result indicates what will happen when you reach the goal. Metrics enable you to measure specific types of goals.
For example, a measurable goal is “I want to increase last year’s revenues by 10%.” The number attached to your goal is 10%. Take last’s year total revenue (e.g., $1,000,000), multiply it by 10% (1,000,000 x 0.1 = 100,000), and add it to last year’s total revenue to get your revenue goal for this year ($1,000,000 + $100,000 = $1,100,000).
Reverse-Engineer Your Goals
Reverse-engineer measurable goals to produce actionable tactics and processes. For example, your goal is to increase annual revenue by $10 million. You have an end goal — now you have to figure out how to get there. Answer the following questions to identify the steps and actions that will help you reach the goal:
- How can I increase revenue from current customers?
- What are potential sources of new business revenue?
- How can I increase sales through direct channels?
- How can I increase sales through indirect channels?
Key Metrics for Startups
The objectives you measure as a startup will change as you grow. Use the following metrics as starting points to measure the goals that matter to your business.
Customer Lifetime Value
A customer’s lifetime value (LTV) is the amount of revenue a customer can generate over the lifetime of their engagement with your business. If you sell a subscription product or service, multiply the average purchase value by purchase frequency to determine the customer value. Then multiply the average customer value by the average retention period (i.e., in months or years) to find the LTV. Knowing how much you will earn per customer will help determine how much to invest in customer acquisition.
Customer Acquisition Cost
The customer acquisition cost (CAC) is how much you spend to acquire a customer. Your costs include what you spend on sales, marketing, and distribution activities. One simple method is to divide all money spent in a period (e.g., marketing costs) to acquire customers by the number of new customers acquired during that period. For example, if you spent $1,000 on Facebook marketing, and you signed up 20 new customers through Facebook, your CAC would be 1000 / 20 = $50.
Early-stage startups with a new product and an unknown brand tend to have higher CACs. They might have to spend more on marketing to attract customers. Your CAC should decline as you develop a better understanding of your ideal customers and attract referrals.
Churn Rate vs. Customer Retention Rate
Churn rate refers to the percentage of customers who do not continue to give your company business. If you have 100 new customers, and five of them cancel their subscription to your service, your churn rate is 5%. High churn rates could mean you are bringing in the wrong customers or there is a problem with your product, service, or processes. Your goal should be to reduce your churn rate.
Customer retention rate refers to the percentage of customers you retain or who renew their subscription. Using the numbers from the section above, your customer retention rate is 95%. Having a high retention rate means customers are satisfied with your product and service, and you are delivering the promised value.
Burn rate refers to how much capital your company spends to finance operations. Subtract your ending balance from your starting balance and divide this result by the number of months. For example, if you had $250,000 in the bank and received $750,000 from an investor, your new starting balance would be $1,000,000. If your cash balance drops to $700,000 after three months, your burn rate is ($1,000,000 - $700,000) / 3 months = $300,000 / 3 months = $100,000/month.
Different factors will affect your burn rate, such as growth strategy, business model, and available funding. A “high” burn rate is not necessarily bad, nor is a “low” burn rate automatically good. The desired burn rate depends on the industry. Startups tend to take longer to become profitable, and their burn rates will vary.
Cash Flow vs. Net Income
Cash flow is the difference between ongoing revenue and expenses. If revenues are greater than expenses, you have positive or free cash flow and more money coming into your business than going out. If you spend more than you earn, you have a negative cash flow, which is unsustainable over time.
Net income is the difference between overall revenue and expenses. The goal is to increase revenue and reduce expenses wherever you can. Monitor the metrics above to increase the difference between revenue and expenses to make your startup more profitable.
Using the Right Measurements for Your Startup’s Goals
Set measurable goals to determine exactly where you want to go. What you can measure can be managed and evaluated. Choosing the right metrics will help you to track and evaluate how well you are progressing toward your goals.
Do you need help with making sense of your metrics? Sellerant can guide the way.