Metrics to be compiled, stored, monitored and actioned on a continuous basis:
90% of Startups in India fail within five years of operations.
One of the widely accepted reasons startups fail to continue their operations beyond 5 years is their inability to raise funds which helps them in flourishing further. Many startups fail to get spotlight of Venture capitalists because of lack of intensity in their numbers.
Yes! Numbers speak louder than words.
Hence keeping track of key metrics for a company is fundamental and this requires comprehension of the components that actually drive the growth of its value. This makes us realize if we are growing in the right way with the right team day over day and month over month and are important to measure and determine the performance of outcomes, behaviors, initiatives, and activities in the business. Establishing such right metrics boasts your confidence before going to VC and is a key step in the business road to success.
These drivers or metrics differ from industry to industry. Let’s see the industry wise metrics to know must before approaching a VC.
- Revenue per available seat hour
As the name suggests, this is a measure of the revenue earned by a restaurant per available seat hour. Available seat hours mean the number of seats available during the regular hours of operation. Therefore, the higher the value of this KPI, the higher your restaurant is earning from its given seating capacity.
- Revenue per available square meter
Divide the total sales by the total dining area of your restaurant and you get the revenue per available square meter. Gradual improvement in this metric signifies a good generation capability of the serving division in your restaurant.
- YOY growth in Revenue per Restaurant
Divide the change in Revenue per restaurant between 2 consecutive years (say year 1 & year 2) by Revenue per restaurant in year 1. In case of chain of restaurants, this metric helps in projecting the improvement of revenue generating capacity per restaurant. YOY growth in GMV (Gross Merchandise Value) can also be used.
- Revenue per Customer (or) Table:
This KPI measures the average sales from each restaurant table or each customer over a period. Needless to say that this figure should be as high as possible as it shows the capability of your restaurant to earn well.
- Gross Margin from Top selling menu items
Make sure you follow Pareto analysis. That is 80% of your revenues/gross profit comes from 20% of menu items.
- Fill rate
Your fill rate is the percentage of all orders that you ship on time and in full.
- ARPOB (Average Revenue per Operating Bed)
Computed by dividing Total Revenue with Occupied bed days. ARPOB helps to find the revenue per day that we attain for every occupied bed.
- Average Revenue per patient
This is as simple as dividing the total revenue by number of patient. This can further be broken down to category wise and year on year growth in this metric exhibits improvement in operations.
- Category wise Average length of Stay
Divide the number of billed bed days by number of in-patients category wise. It denotes the average number of days spend by a patient and is a measure of efficiency.
- Occupancy %
The bed occupancy rate measures the proportion of hospital beds in use at any one time. It is a great KPI for measuring operational and capacity utilization.
- Selling Expenses to Non-referral Revenue:
This metric indicates non-referral patient acquisition cost and it shall be reduced gradually.
- Referral cost to Referral Revenue
Similar to above metric which indicates referral cost as a % of revenue earned from referrals.
- Sales per square foot
Sales data is compared to physical store size to calculate the efficiency of sales considering the square footage in a store
- Average transaction value
Average transaction values take sales and divide them to find out how much on average customers spend in your store each time they make a purchase. If you can encourage customers to increase their average purchase through merchandising strategies, identifying popular products, or shopping promotion programs, then your efforts will likely boost your profit and enable your company to grow.
- Inventory turnover ratio
Tracking inventory turnover will help you figure out how fast inventory moves. If you’re sitting on stock for too long, you’re likely losing money.
- Conversion rate
Simply put, retail conversion rate measures the proportion of visitors to a store that make a purchase. The ultimate goal of any retail enterprise is to convert sales, making your conversion rate paramount to success.
- Conversion rate
Conversion rate is the number of customers that complete a sale after visiting your site and viewing a product. Conversion rate is closely tied to overall revenue metrics.
- Average Order Value
The average order value (AOV) is the monetary value of an average customer order on your site. Track AOV as a whole, and then segment by device type, platforms, and traffic sources. Identifying the sources of the highest AOV customers will help you run more ROI-positive marketing campaigns.
- Cost per acquisition
The cost per acquisition is how much it costs to gain a new customer. This will include advertising costs, email campaigns, discounts offered, and anything else it took to actually make the sale to a customer.
- Revenue on Advertisement spent
Divide revenue by the cost of advertising to get a ratio of the average revenue returned based on advertising costs. This value is how much we earn on each advertising rupee spent.
- Average Response time
It is the average time from customer raising query to resolution. Reducing the average response time means first-time shoppers will be more likely to make a repeat purchase.
Common Metrics for any Tech startup:
- Average Monthly(or) Annual recurring revenue:
It’s an important metric to measure because it shows the profitability of a company, as well as predicting the expected revenue for next month. Therefore, the goal is to keep this number as high as possible while, of course, maintaining the client month by month.
- Customer acquisition cost (CAC):
CAC is the amount of money you need to spend on sales, marketing and related expenses, on average, to acquire a new customer. This tells us about the efficiency of your marketing efforts and can also be compared to competitors’ CAC.
- Customer retention rate:
Indicates the percentage of paying customers who remain during a given period of time. When we see high retention rates over an indicative time period, we know the company has a sticky product and that it is keeping its customers happy. This is also an indicator of capital efficiency.
- Churn rate
It is percentage of customers who doesn’t remain as customers. It is opposite of retention rate,
- Lifetime value (LTV):
It is the measurement of the net value of an average customer to your business over the estimated life of the relationship with your company. Understanding this number, especially in its relation to CAC, is critical to building a sustainable company.
- CAC to LTV Ratio:
We consider the ratio of CAC to LTV to be the golden metric. This is a true indicator of the sustainability of a company.
- CAC recovery time (or months to recover CAC):
This KPI measures how long it takes for a customer to generate enough net revenue to cover the CAC. CAC recovery time has a direct impact on cash flow and, consequentially, runway.
It is the measure of the amount of time until the company runs out of cash, expressed in terms of months. Runway is computed by dividing remaining cash by monthly burn.
- Burn rate:
The startup metric Burn Rate is the negative cash flow of a company. It shows how quickly the startup is spending money. This key metric is essential for determining how much cash the company needs to keep operating and growing. It is measured by dividing available cash by monthly operating loss (revenue – expense).
Other Key Common Market related Metrics:
- TAM (Total Available Market)
Total Available Market (TAM), typically refers to the total revenue of the market that your startup is operating in. (in geographical terms)
- Market Share
Startup’s potential market share, measured by computing sales as a percentage of an industry’s total revenue.
- Industry Growth
You can calculate your industry growth rate by dividing the change in market size by the original market size, then multiply the sum by 100. For example, say you are developing an app for the food and beverage industry. Maybe the app uses an algorithm to make craft beer recommendations for food pairings based on user preferences and data.
While the entire food and beverage industry might only be growing at 7 percent per year, the craft beer segment may be growing at 14 percent per year. Whenever you can demonstrate that your niche is growing faster than the market it operates in, it is obviously an attractive market segment.
Identify your North Star metric!
Identifying your North Star Metric can be the difference between becoming a great company or one that’s on its way out. Identifying it also helps you understand your customers and product better.
What is North Star metric?
The North Star Metric (NSM) is the key measure of success for the product team in a company and essentially another name for the one metric that matters—it’s a specific metric that best captures the core value your product delivers to customers. Focusing on and optimizing company-wide efforts to improve your NSM is key to driving long-term sustainable growth in your company.
How to identify NSM?
It should truly capture the heart of your business. The best way to approach determining yours is to understand what truly drives your business.
Few examples could be
- Airbnb: Nights Booked
- Facebook: Daily Active Users
- Quora: Number of questions a user answers
- WhatsApp: Number of messages a user sends
Every North Star metric can have 4 dimensions – breadth, depth, frequency and efficiency.
Below is the example of a North Star tree for a grocery ordering and delivery app. The tree ties together a dozen different product initiatives together into a single framework to drive each dimension of the North Star metric forward.
Importance of Metrics in Business Valuation:
Tracking metrics lets you improve overall results and align people & processes with your business goals. These are used to drive improvements and help business focus on what’s important. It highlights the issues if any, which might go unnoticed otherwise. Also, helps you to change and evolve with the organization, thereby accelerating the business value.
All these metrics finally turn your business into a worthy one in the eyes of venture capitalists. When judging an early stage startup, Venture investors focus on analyzing the company metrics in their own approach and judging the startup. Hence it’s necessary to have right metrics in place with a monitory mechanism on a continuous basis.
Identifying and defining right metrics is just the start. It further requires understanding of the kind of data required, ways to collect and maintain it. Data is utmost important since wrong input leads to wrong output. Hence this forces you to have an effective Database management system to avoid data redundancy and data inconsistency, which may otherwise end up having an unreliable or meaningless information.
With that reliable data, measure metrics and analyze, but don’t forget the continual part of monitoring and improvement. This may require periodic Management Information system (MIS) which makes an Entrepreneur’s life easy in knowing and managing the numbers.