Lead indicators: not as boring as they sound, and they’ll make your startup more profitable than Google. Trust me.
Starting and running your own business can be a detailed and challenging, especially if you don’t come from a business background. One of the most important areas to understand is the world of metrics. But don’t worry! I’m here to help you learn the language of metrics, and today, we’re focusing on what I like to call the “Fabulous Five.”
Metrics are more than just numbers. They’re like vital signs for your business, providing a snapshot of its health and helping to predict its future. Too often, new business owners get lost trying to under their Profit & Loss statement (P&L), a lagging indicator that shows you where you’ve been, not where you’re going.
Instead, I want to talk about the concept of ‘lead indicators.’ These are all the numbers that are forward-looking. They provide insight into your future performance and can often be influenced directly by your actions.
1. Customer Acquisition Cost (CAC)
CAC is the total cost of acquiring a new customer, including all marketing and sales expenses. This metric is so important because it directly reflects the efficiency of your marketing efforts. If the cost is too high, your profitability will suffer; if it’s low, you’ve got room to grow. My rule of thumb is that for every $100 that you earn in income, about $3-$5 should be invested in marketing.
2. Lifetime Value of a Customer (LTV)
Simply put, this is how much profit you can make from a customer throughout your relationship. A higher LTV means a customer is worth more to your business, and therefore you can afford to spend more on CAC. Keep an eye on the LTV to CAC ratio; a healthy startup should have an LTV:CAC of 3:1.
3. Monthly Recurring Revenue (MRR)
For businesses with subscription-based models, MRR is a key metric. It tells you how much income you can expect each month based on your current customers. MRR helps in forecasting and can be a good sign of stability for potential investors.
4. Conversion Rate
Your conversion rate is the percentage of prospective customers who complete a desired action, like making a purchase or subscribing to a newsletter. High conversion rates often correlate with effective marketing strategies and a compelling value proposition.
5. Net Promoter Score (NPS)
NPS measures customer loyalty and satisfaction by asking one simple question: “On a scale of 0-10, how likely are you to recommend our company/product/service to a friend or colleague?” High scores indicate happy customers, which are likely to lead to referrals and business growth. Getting a true reading from NPS is actually a detailed science and should not be underestimated. Maintaining focus on your NPS however will result in a scaleable and sustainable business for the long term.
The key to success in startup metrics is not tracking every data point under the sun but focusing on a few that really matter – your lead indicators.
Remember, what gets measured gets managed, so choose your Fabulous Five wisely. By focusing on these critical indicators, you’ll be able to steer your startup in the right direction and, perhaps, even outperform Google in profitability one day!
