Running a business without measuring growth can be a waste of company potential at best and a deadly oversight at worst. David Ehrenberg writes for Forbes about seven metrics that will keep the business alive and prospering.
Measuring the Business Pulse
- Revenue run rate
- ARPU (average revenue per customer)
- CAC (customer acquisition cost)
- Churn rate
- Burn rate
- Operation efficiency
- Gross margins
Revenue run rate and ARPU make up the “sales metrics.” Revenue run rate helps you see how sales develop over time, and extrapolating from this data can help you forecast future trends. ARPU meanwhile lets you get into the nitty-gritty to see if you are generating more sales from individual customers.
CAC and churn rate fall into the “customer metrics.” CAC lets you know how much money it takes to attract the customer, and if the proportion of spend versus acquisition does not improve with time, that is an indication that you need to change your strategy. Churn rate then is a measure of how well you hold on to customers. The less churning you do, the better—unless you have a butter company, of course.
Finally, burn rate, operation efficiency, and gross margins make up what Ehrenberg calls the “financial management metrics.” Burn rate is a familiar term to most of us; it just means how much money is disappearing from the company each month. Not managing the burn rate means you go broke, and it happens too often. Operation efficiency is a trickier concept, dealing with returns on your spending. Ehrenberg has this to say:
Low [return] margins could signal that your cost structure is out of whack, that you’re spending too much to get the business to scale, your pricing is too low, or a combination of some or all of the above. Outsourcing as much as you can is one way to get a handle on some of the biggest drivers. But when you’re just ramping up, you’ll need to spend more on sales and marketing to get traction. Spending in the right proportions will deliver the most bang for your buck. The results will eventually show up in your sales and cash figures.
Gross margins then bookend the process as a measure of your operating profitability. Both the level and trend matter, and among other things, gross margins can tell you if your teams are effectively driving the business. For more information, you can read Ehrenberg’s full article here: http://www.forbes.com/sites/theyec/2014/06/20/the-seven-startup-metrics-you-must-track/