The Right Way To Set Goals for Growth: 16 Startup Metrics

Kazuki

Hatched by Kazuki

Sep 10, 2023

5 min read

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The Right Way To Set Goals for Growth: 16 Startup Metrics

Setting goals for growth is a crucial aspect of running a successful startup. However, it is important to approach goal-setting in the right way to ensure that you are focusing on the metrics that truly matter. In this article, we will explore the best approach to setting absolute goals for growth and delve into the key startup metrics that founders should be aware of.

When it comes to setting goals for growth, it is essential to prioritize absolute numbers over relative ones. For example, instead of aiming to increase the conversion rate, focus on goals such as the number of active users and a decrease in churned users. These absolute numbers are what truly matter in measuring growth. By setting goals that align with tangible outcomes, teams can take credit for their actions rather than relying on natural fluctuations in metrics.

It is also important to consider the impact of different factors on the overall growth of your startup. For instance, if you grow traffic to a lower converting country, such as Germany, at the expense of a higher converting country like the U.S., you may hit your traffic goals but not your signup goals. It is crucial to evaluate the activation rate, which is the ratio of activated users to total users. To move this metric in the desired direction, you can either focus on changing the number of activated users or the total number of users.

In order to truly understand and manage the growth of your startup, it is important to be aware of the key metrics that investors value. Andreessen Horowitz, a prominent venture capital firm, highlights the significance of good metrics in running a business effectively. These metrics not only help founders understand the inner workings of their company but also enable them to make necessary adjustments and improvements.

One metric that investors highly value is the proportion of total revenue that comes from product revenue rather than services. Product revenue is considered more valuable as it is recurring, has higher margins, and is more scalable compared to services revenue. By focusing on increasing product revenue, startups can create a more sustainable and scalable business model.

Another common mistake when it comes to metrics is miscalculating the customer lifetime value (LTV). It is important to calculate the LTV as the net profit of the customer over the entire duration of the relationship, rather than simply estimating it based on revenue or gross margin. This holistic approach provides a more accurate representation of the true value that each customer brings to the business.

The Contribution Margin LTV to CAC ratio is a valuable measure to determine the payback on customer acquisition cost (CAC) and effectively manage advertising and marketing spend. This ratio helps identify whether the company can scale its user acquisition budget profitably. By focusing on this metric, startups can ensure that their marketing efforts are generating a positive return on investment and driving sustainable growth.

When evaluating the growth and health of a SaaS company, a useful proxy metric to consider is billings. Billings are calculated by taking the revenue in one quarter and adding the change in deferred revenue from the previous quarter to the current quarter. This metric provides insights into the growth trajectory of the company and its ability to generate consistent revenue.

While blended CAC, which calculates the total acquisition cost divided by the total number of new customers acquired across all channels, is commonly used, it does not provide a clear picture of the profitability of paid campaigns. Investors consider paid CAC, which focuses specifically on the acquisition cost of customers through paid marketing, to be a more important metric. This metric provides higher resolution insights into the profitability of user acquisition efforts and enables better decision-making regarding the allocation of marketing budgets.

It is important to note that cumulative charts, which show a continuous increase in metrics over time, can be misleading indicators of growth. A business may appear to be growing when in reality it is shrinking. Monthly revenue and new user metrics provide more accurate and reliable indicators of a company's health and growth trajectory.

In conclusion, setting goals for growth should be approached with a focus on absolute numbers rather than relative ones. By setting goals that align with tangible outcomes such as the number of active users and a decrease in churned users, startups can measure their true growth. Additionally, being aware of and utilizing key startup metrics, such as product revenue, customer lifetime value, and paid CAC, allows founders to make informed decisions and drive sustainable growth. Here are three actionable pieces of advice to consider:

  • 1. Prioritize absolute numbers: Set goals that align with tangible outcomes such as the number of active users and a decrease in churned users. These absolute numbers are what truly matter in measuring growth.
  • 2. Focus on product revenue: Invest in strategies that increase product revenue, as it is recurring, has higher margins, and is more scalable compared to services revenue. This will help create a sustainable and scalable business model.
  • 3. Calculate LTV accurately: Calculate the customer lifetime value as the net profit over the entire duration of the customer relationship, rather than estimating it based on revenue or gross margin. This holistic approach provides a more accurate representation of the true value that each customer brings to the business.

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