Metrics for Startups: Terms and Uses

The world of tech entrepreneurship can be overwhelming for beginners, so here we provide a detailed list of metrics to help you understand how to measure your efforts and communicate them to your investors.

The success of any initiative is based on measuring, adjusting, and improving. Startups are no exception to this rule. Identifying the metrics that fit your business model and how to obtain them is crucial for tracking your startup's strategy and sharing this information with investors.

There is much to learn in this field, and here we break down each of the most common concepts and their typical uses. Spanglish is part of the jargon, so don't stress if you find some terms in English. This is usually the common practice, so get to know it!

Disclaimer: This list is comprehensive but not definitive and is constantly growing. Check back from time to time to see updates.

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Customer Acquisition and Retention Metrics

- Customer Acquisition: This refers to the process a startup follows to attract individuals or companies and convert them into customers. This involves understanding the market, establishing sales and marketing strategies, and optimizing the onboarding process. The outcome of this strategy is reflected in the "new customers" metric.

- Retention: Customer retention refers to the strategies and actions applied to keep customers "engaged" or satisfied, which is reflected in repeat purchases and customer loyalty. The results of this concept are shown in a high customer retention rate and a low "churn" or customer attrition rate.

Customer Retention = (Retained Customers / Customers at the Start of the Period) x 100

For example:

Customer Retention = (180 / 200) x 100 = 90 %‍

- Churn: This is the rate at which customers stop using a product or service, expressed as the percentage of customers who discontinue their use. It is a crucial metric, especially in subscription-based models. It is calculated as follows:

‍ Customer Attrition (Churn) = (Los Customers / Customers at the Start of the Period) x 100

For example:

Customer Attrition = (20 / 200) x 100 = 10 %

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Unit economics

- Customer Acquisition Cost (CAC): This is the cost incurred by the startup to acquire a new customer. It is fundamental for measuring the efficiency of the sales and marketing strategy. It is calculated as follows:

CAC = Marketing and Sales Costs / Number of New Customers

For example:

CAC = $10,000 / 100 = $100

‍- Customer Lifetime Value (LTV): This metric estimates the net value a customer generates during their business relationship with the startup. It is especially important in recurring services. The formula to calculate LTV is:

LTV = Average Order Value × Total Number of Orders

For example:

LTV = $100 × 5 = $500

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Revenue Metric

- MRR (Monthly Recurring Revenue): This is a fundamental metric for subscription-based business models that reflects the monthly recurring revenue. For example:

MRR = Number of Customers × Average Revenue Per User (ARPU)

For example:

MRR = 100 × 50 = $5000

- ARR (Annual Recurring Revenue): This metric represents the annual revenue from customers on recurring contracts and is calculated as follows:

ARR = MRR × 12

For example:

ARR = $10,000 × 12 = $120,000

- Month-over-Month (MoM): This percentage measures the growth of a particular metric from one month to the next.

MoM MRR Growth = (MRR February - MRR January / MRR January) × 100

For example:

MoM MRR Growth = (12,000 - 10,000 / 10,000) × 100 = 20%

This means that MRR grew by 20% in February compared to January.

- Year-over-Year (YoY): This annual percentage measures growth from one year to the next by comparing a metric over a period against the same period of the previous year.

For example:

Let's compare the MRR from March 2023 to March 2024:

MRR March 2023 = $50,000

MRR March 2024 = $200,000

YoY MRR Growth = (200,000 - 50,000 / 50,000) × 100 = 300%

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Financial Metrics

- Cash in Hand: This is the amount of money available in the bank at a given moment. It reflects the startup's liquidity.

- Gross Burn Rate: This refers to the total amount the company is spending from its available capital for operations over a period, usually monthly. It is calculated as follows:

- Gross Burn Rate = Total Operating Expenses

For example:

Gross Burn Rate = $50,000

- Net Burn Rate: This metric includes all the money the startup is spending each month. It is used to determine how much time the company has left based on its recurring expenses. Unlike the Gross Burn Rate, it includes all expenses incurred by the startup.

Net Burn Rate = Monthly Revenue − Monthly Expenses

- Runway: This is the amount of time the startup has before it runs out of cash to continue operations, typically expressed in months. For example:

Runway = Cash in Hand / Monthly Net Burn Rate

For example:

Runway = $200,000 / $25,000 = 8 months