Building a company is a roller coaster of emotions and challenges. One day you’re up on the highs of your latest success. The next day you’re down, dealing with an HR issue or scrambling to find a new supplier.
Among all that turmoil, you need to keep the ship on course toward your long-term goals. You need to know if the business is headed in the right direction, or if there are things that aren’t working well that need correction.
While many business owners talk about running their businesses on “gut” and “instinct,” truly successful entrepreneurs rely on actual data to know how their business is doing and how they can improve tomorrow, next week, and next month. They’re setting goals and using those goals to drive their winning strategies.
Business owners who succeed in meeting their goals have one common thread: They all track their progress toward their goals. And, to do that well, they need to know what metrics and data they should track and what they can safely ignore.
I’ll go into more detail below, but for the sake of ease, here’s an index of those key metrics:
2. Conversion Rates
3. Customer Acquisition Costs (CAC)
4. Average Revenue per User (ARPU)
5. Lifetime Value (LTV)
7. Unit Economics
9. Net Promoter Score
11. Sources of Traffic or Customers
12. Accounts Payable and Receivable
13. Burn Rate and “Runway”
14. Gross Margin
15. Inventory Turns
17. Customer Concentration
The 5 rookie mistakes tons of startups make:
Below I’ve listed the things you really don’t want to do when you start a new business, and ideally at any time in the life of your business.
1. Tracking vanity metrics
Most startups, especially companies making apps and other online businesses, are swimming in data.
The key is determining what to track and what’s just simply not important. It’s tempting to fall into the trap of tracking metrics that don’t really matter all that much and don’t truly tell you how your business is doing.
Good examples of this are metrics like page views or number of Facebook followers. Neither of these metrics tell you if you are building a solid business. Sure, people are showing up. But are they just clicking once and leaving? Are they buying something from you, joining your mailing list, or leaving insightful comments? If a metric just looks good on paper but doesn’t tell you if your business is doing well, you can skip it.
2. Using poorly defined metrics
Data is only as good as its definition, and a metric that is not defined well won’t help you make good decisions.
For example, an online community might say that it has 30,000 “active” users. But what does “active” really mean? It could mean that a user just showed up once and then left. That’s hardly what I would call “active.”
Perhaps a better definition would be a user who showed up, clicked on four pages, and signed up for an email list. Whatever metric you’re looking at, make sure you define it well so that when you try to improve it, you can come up with good ideas for making it better.
3. Focusing too much on the short term
We’ve all been there; sales are down for one day and we scramble like the roof is on fire to try and figure out what is going on.
Unfortunately, more often than not, it’s just a random aberration in how people behave from one day to the next. In any business, you can expect a few days a month to be better or worse than “normal,” and you can quickly fall down the rabbit hole trying to figure out what happened.
Instead, recognize when these random events happen and wait a day or two to see if you have an actual pattern before you ring the alarm bell. You’ll save yourself and your team a lot of time and energy focusing on real problems and not just random swings in the data.
4. Not taking action
While it’s certainly common to find entrepreneurs that aren’t tracking much (if any) data about their business, it’s also common to see people tracking tons of data. The mistake that happens to people who track lots of data is often forgetting to take action on the data they’re collecting. They spend all their time and effort collecting and collating data and don’t have time left for analysis.
Everything that you measure should help you track progress toward your goals and help you make decisions. If a metric changes significantly and there’s no action to take, then perhaps you shouldn’t track that metric. Don’t get so wrapped up in data collection that you forget to use it to actually steer the ship.
5. Recording data just to record it
Just because you can measure something, should you?
While it’s tempting to track as many metrics as you can think of, you want to make sure that your key numbers are easy to find without being obscured by a bunch of data that just doesn’t matter.
Focus on tracking and watching the key metrics that drive your business—the metrics that determine if you’re on track to meet your goals. Dump the stuff that just isn’t useful or actionable.
Focus on metrics that actually drive growth in your business:
There are lots of metrics that you can track for any business. Here’s my list of top metrics that are key drivers of growth:
Active Users or Repeat Customers
For a content site or subscription business, tracking how many active users you have shows how engaged your customers are with your site or product.
If you have a large portion of your users that are paying but not “active,” then you might have a problem because people aren’t finding your service useful.
If you run a retail store, tracking repeat customers is a similar metric. You don’t want people to buy once, not be satisfied, and never come back again. You want repeat customers, because getting a customer’s business the second time is almost always cheaper and easier than it is the first time.
This is a pretty broad category, but it’s extremely useful.
A conversion rate is simply the number of people who see an offer, divided by the number of people who actually take action. For example, in advertising, if 100 people see an online ad and five people click, you have a five percent conversion rate for that ad.
Conversion rates are incredibly useful for tracking success in advertising, progress through online shopping carts, converting users from free products to paid products, and much more. You can even measure conversion rates in physical retail stores by tracking browsers versus buyers.
The key to tracking conversion rates is that you can then focus on improving a particular process, and know immediately if you’re making improvements.
Customer Acquisition Costs (CAC)
No, CAC is not the sound your cat makes when it’s coughing up a hairball. It stands for Customer Acquisition Costs, and it’s the average amount of money you spend to acquire a single customer.
So, if I spend $1,000 on ads on Google and get 100 new customers from that effort, my CAC would be $10. Ideally, I’m going to want to try and figure out how I can reduce my CAC over time so that my business becomes more profitable.
Average Revenue per User (ARPU)
You don’t have to have “users” for this metric to matter to you. You could have customers, and you’re tracking average revenue from those customers over a given period of time, usually one month.
So, if I book $20,000 in revenue last month from 500 customers, my ARPU would be $40. This is a number that I’d like to move up over time—I want my customers buying more or signing up for higher price tiers.
Lifetime Value (LTV)
How much are your customers worth to you over time? Do they subscribe to your service for a year and then quit? Do they buy from you four or five times and then never come back again?
This is Lifetime Value, or LTV. It’s the average value a customer will be to you over their “lifetime” of being your customer. If you’ve been in business for a while, you may have the data to determine this number. If not, there are ways to predict it.
A person “churns out” when they cancel their subscription or stop being a customer.
Churn rate is measured by dividing the number of customers you have by the number of customers who cancel. Churn is a slightly complex topic, so I have an entire post dedicated to explaining it.
This sounds complicated, but it’s not. If you know the Lifetime Value (LTV) of your customers and you know how much it costs to acquire customers (CAC), then you can do a “unit economics analysis.”
This is really just a fancy way of saying, “Are you making more from your customers over time than it costs to acquire your customers?” For example, it might cost you $100 to get a new customer, but that customer will spend $300 with you over time. The unit economics for this customer is simple the ratio of LTV-to-CAC, in this case, $300:$100, a 3x ratio.
There’s a great and very detailed post on this topic on the For Entrepreneurs blog if you want more information on this topic.
For most businesses, their best source of new business is from referrals from existing customers.
I’m sure you’ve told your friends about the last great meal you had, or about a new online service that’s saving you a ton of time. Done right, this type of marketing is nearly free and more powerful than any advertisement, so it’s worth tracking if you can.
Find out who is referring your product and why they think it’s great. Use that data to build things that customers want. You can also use the percentage of new customers who come to you from referrals as a measure of how good your overall customer experience is. If referrals start dropping, perhaps something in your product or store isn’t quite right.
Net Promoter Score
This is related to referral tracking. Net Promoter Score (NPS) measures how likely your customers are to recommend your business to a friend. You measure the results on a simple 1-10 scale, and then group the results into these buckets:
- Detractors: scores 0-6
- Passive: scores 7-8
- Promotors: scores 9-10
Calculate the percentage of your customers that are promoters and then subtract the percentage that are detractors. That’s your score. You want your number to be positive and try and push it is high as possible. 100 is the highest score you can get, but a 50 is considered excellent.
Sources of Traffic or Customers
I talked briefly about customers that come from referrals. You’ll also want to know all the other places your customers come from.
Beyond word of mouth, are there advertising channels that work for you? Are there trade shows that help bring in new business? Track which sources bring in customers and which are just a waste of money so you can focus on what works and stop spending time and money on what doesn’t.
Focus on the financial metrics that are key to your survival:
All of the metrics above are excellent metrics worth tracking, but at the end of the day, you need to focus on the actual money that flows in and out of your business. Here are the metrics to watch that keep your business alive:
Cash and Cash Flow
In business, cash is king.
If your bank account gets to $0, you’re in pretty big trouble. So, if you track nothing else, keep track of your cash.
Very closely related is your cash flow, which is the amount of money that moves in and out of your business during a given time period—usually a month. For lots of detail on cash flow, check out my detailed post on the topic.
Accounts Payable and Receivable
AR and AP are very closely related to cash flow and are key guides to your company’s health.
In a nutshell, Accounts Payable (AP) is how much money you owe to your suppliers—basically the bills that you need to pay. Accounts Receivable is money that is owed to you—typically invoices that you have sent out to customers but that haven’t been paid yet.
Ideally, you don’t want either of these numbers to grow too much because that means that either you aren’t paying your bills or that your customers aren’t paying you on time. You can learn more in my detailed posts on accounts receivable and accounts payable.
Burn Rate and “Runway”
Leave it to Silicon Valley to come up with these dramatically named metrics. They’re really quite simple, though.
Burn Rate is how much money you’re spending over and above what you’re making. This number is pretty important for startups because they’re typically spending more than they’re making in the early days.
Runway is simply looking at your cash in the bank and figuring out how long your business can last at its current burn rate. Basically, you need your business to “take off” and start earning its keep before cash runs out. You can read more on these metrics in our post on burn rate.
Less complicated than it sounds, Gross Margin is the difference between what it costs you to make what you sell and the revenue that you bring in.
So, if you make bike parts, your costs are everything related to the actual manufacturing process of those parts. Subtract your costs from your sales and you have gross margin.
Gross margin helps you keep on top of how efficient you are as a company. Perhaps you can drive up gross margin by finding more efficient or cheaper ways to build your product, giving you more money to spend on other parts of the business. Read more about costs and gross margin.
If your business carries inventory, you’ll need to track Inventory Turns. This is typically calculated by dividing the cost of goods sold for a period against the average inventory for that same period.
People typically measure inventory turns in annual cycles. This number tells you if you’re building up too much inventory or if demand for your products is slowing down. There’s a great post on this topic and why investors think it’s important at the A16Z blog.
No, I haven’t forgotten profit. If you’re tracking your numbers, you’ll certainly be tracking this one. That said, a word of caution: don’t confuse profits with cash. They aren’t the same thing and it’s very important to understand the difference.
I’ve seen companies go under because they didn’t pay enough attention to this metric. Customer Concentration is the percentage of revenue you get from your largest customer or the top couple of customers. If the percentage is too high, you’ve got too many eggs in one basket and you should be looking to expand your customer base. You don’t want your business to fail just because you lose one customer.
- Test everything: It’s one thing to track your metrics, but it’s another thing to improve them. The only way to move the needle is to try new things and the best way to do that is with A/B testing. Try new landing pages, new advertising headlines, or even new store layouts. Track and measure your results and figure out what works and what doesn’t. The key with testing is knowing what metric you’re trying to impact. Is it your conversion rate or perhaps your Average Revenue per User? Use testing to optimize your metrics and grow your business.
- Only deal with significant numbers: It’s tempting to make some changes to your business, see the initial results and come to the conclusion that the changes you made were great (or terrible). That might not be the case, though. If you don’t have enough data, or if your data isn’t statistically significant, you might draw the wrong conclusions. This topic is too big to go into here, but you can learn more over at the Kissmetrics blog.
- Ask: What action would I take? The only metrics that matter are the ones that you actually take action on. Just skip the vanity metrics that you can’t (or won’t) do anything about. The best litmus test I’ve found to determine if I should track a particular number is to ask myself, “If this number goes up (or down), what would I do?” If there’s nothing specific I would do, then I don’t track the number. Only track the numbers that help you make decisions.
- Track your progress frequently: Tracking your progress not only gives you more opportunities to improve your business, it’s been proven to help you actually attain your goals. The research reports that the more frequently you measure your results, the better you will do. So, once you’ve identified the metrics that are the key drivers of growth in your business, make sure you measure them and track them as often as you can—at least monthly, but perhaps weekly for some numbers.
Every business is unique and will have specific things that drive success. But, the metrics listed here should give you a good start. If I missed anything, let me know in the comments.