STARTUPS

8 Simple Startup Business Model Metrics

Metrics will help you manage your business internally and where relevant, to present useful figures to venture capitalists (VCs) and business angels (BAs).

Startup business model metrics – are best understood as how you intend to charge your users or how to value your business – not necessarily from an accounting standpoint.

However, metrics are mostly about what you as the owner, who knows the business wants to track.

startup business model metrics
Image by Tumisu from Pixabay

The first step of every startup is how to get the users and how to monetize the business. Thereafter, at the early stage every founder should track firstly, burn rate (obviously because you’re spending cash), so you don’t run out of money for operating your business for the next 6 – 9 months.

Secondly, every founder should track gross margin. Especially if the business is e-commerce or consumer-related. This would help to decide if the business is making money on a per transactional basis.

Most startup business model evolve over time. The most important is your short-term focus.
For a transactional business for example, your short term goal or focus (1 or 2 years) is to find product market fit.

There are common startup metrics mistakes to avoid. However, in this article, we’ll look at some startup business models metrics.

The startup common business models include:

  • Enterprise
  • Infrastructure as a Service (IaaS), Platform as a Service (PaaS) or Software as a Service (SaaS).
  • Subscription
  • Transactional
  • Marketplace
  • E-Commerce
  • Advertising
  • Hardware
Startup business model metrics

Enterprise startup business model metrics

An enterprise startup refers to a company that sells services or software to other businesses (business-to-business – B2B) on a single license basis.

For example Yammer, an enterprise social media tool that provides intranet facilities for companies. Similar to Twitter and Facebook being implemented within companies to achieve similar goals of information sharing and collaboration.

The contracts tend to have fixed terms, designated contract values and come up for renewal at the end of the term.

An enterprise startup business model metrics would include:

  • Booking – sum of all the customer contracts. Note letters of intent and vertical agreements are not bookings.
  • Total customers – total number of unique contracted customers.
  • Revenue – recognized when the service is actually provided or reliably over the life of the agreement.

Common enterprise startup business model metrics mistakes to avoid are:

  • Using Bookings and Revenue or Bookings and Annual Contract Value (ACV) interchangeably.
  • Including letters of intent (LOIs) and vertical agreements in bookings – they are not yet bookings.

Software-as-a-service (SaaS) startup business model metrics

A SaaS company sells subscription-based licenses for a cloud-hosted software solution.

The company charges monthly for services provided. For example, Sendbird, Salesforce.

A SaaS startup business model metrics include:

  • Monthly Recurring Revenue – revenue recognized for recurring services rendered in a given month (does not include one-time or non-recurring revenue such as fees and professional services revenue). Revenue is recurring because the company gets paid every month for the use.
  • Annual Recurring Revenue (ARR) – Measure of revenue components that are recurring in nature on an annual basis. When the company is growing fast at a certain percentage, it is helpful to track MRR as it shows the pace of growth.
  • Gross MRR CHURN – Monthly recurring revenue lost in a given month/monthly revenue at the beginning of the month. The gross MRR churn shows the difference between the MRR expected and the actual which could be attributed to customers who stop using the service at some point.
  • Paid CAC – Cost per customer acquired through paid marketing channels (total sales and marketing spent in a given month/total customers acquired via paid channels including via sales in a given month).

Common SaaS startup business model metrics mistakes to avoid are:

  • Using Annual Recurring Revenue and Annual Run-Rate interchangeably. Annual Run-Rate is calculated by multiplying one months all-in revenue by 12. It shows the annual absolute.
  • Don’t include one-time or non-recurring revenue such as fees and professional services revenue in your monthly recurring revenue (MRR) calculation – only include recurring revenue.

Subscription startup business model metrics

A company with a subscription model sells a product or service, usually to a consumer, on a recurring basis.

This is more relevant for consumer businesses. It is similar to SaaS in terms of metrics but differs in that instead of ARR – monthly growth and unit churn are measured. For example Netflix has millions of customers.

A customer that pays $20 per month can end subscription or thousands of customers paying $20 per month can end their subscriptions.

Therefore, gross unit churn is measured for a subscription startup while SaaS startups measure revenue churn.

The key subscription startup business model metrics are:

  • Monthly Recurring Revenue (MRR): revenue recognized for recurring services rendered in a given month (does not include one-time or non-recurring revenue such as fees and professional services revenue).
  • Compound Monthly Growth Rate (CMGR): implied compound monthly growth rate between two disparate months. [CMGR = (latest month MRR/first month MRR)*(1/#of months)-1]. This measure helps to capture spikes in growth that a subscription business encounters.
  • Gross User CHURN: Total lost customers (cancelled subscriptions) in a given period/prior period total customers
  • Paid CAC – Cost per customer acquired through paid marketing channels (total sales and marketing spent in a given month/total customers acquired via paid channels including via sales in a given month).

Common subscription startup business model metric mistake to avoid:

Don’t measure CMGR as a simple average of discrete monthly growth rates. By using averages, your growth will look better than it really is because of spikes. To avoid this, use the correct formula.

Transactional startup business model metrics

A transactional startup company enables financial transaction on behalf of a customer for a fee (usually a percentage of the underlying transaction). For example fintech companies such as, Paypal, Stripe, Coinbase.

The key transactional startup business model metrics:

  • Gross Transaction Volume – total sales or payment dollar volume transacted in a given period. Remember such a company receives the payment volume of other startups and collects a fee for it. The GTV is this total amount.
  • Net Revenue – The portion of GTV that the company recognizes as revenue for services rendered. The portion of the total amount (fee) that the company collects.
  • User Retention – Percentage of customers who go on to make at least one purchase in a month. This is a cohort metric – the information is key because since those customers rely on your platform they should continue using it unless they are out of business or a competitor is now processing their business. Cohort is a group of customers acquired within a given period e.g. usually monthly – 28-day. The retention can be recalculated on a month, 2 month, 6 month or 12 month basis depending on a business model.
  • Paid CAC – Cost per customer acquired through paid marketing channels (total sales and marketing spent in a given month/total customers acquired via paid channels including via sales in a given month).

Common transactional startup business model metric mistake to avoid:

  • Confusing Gross Transaction Volume and Revenue as the same thing. The former is the total transaction while the latter is the fee earned.

Marketplace startup business model metrics

A marketplace startup company acts as an intermediary in the sale of a good or service between sellers and buyers, generally collecting a percentage of the total transaction value.

It is a bit similar to transactional but it is typically used by consumer company. For example Jumia, Spring, eBay, Airbnb. In a marketplace there are two sides.

In the case of an Airbnb, there is a guest who goes to the platform to book accommodation with a host.

The key metrics of a marketplace startup are:

  • Gross Merchandise Value (GMV) – total sales dollar volume of merchandise transacted in a given period.
  • Net Revenue – the portion of GMV that the company recognizes as revenue for services rendered.
  • Net Revenue CMGR – compound monthly growth rate. Implied compounded monthly net revenue growth rate between two disparate months. [CMGR= (latest month net revenue)/first month net revenue*(1/#of months)-1]. Compounded metrics and user retention metrics are used in consumer business
  • User Retention – User Retention – Percentage of customers who go on to make at least one purchase in a month. This is a cohort metric.
  • Paid CAC – Cost per customer acquired through paid marketing channels (total sales and marketing spent in a given month/total customers acquired via paid channels including via sales in a given month).

Common marketplace startup business metric mistake to avoid:

  • Falling to include all the costs associated with user acquisition such as referrals, discounts, credits etc in the paid cost per customer acquired.

E-Commerce startup business model metrics

An e-commerce startup company sells physical goods online. Generally, e-commerce companies manufacture and inventory those goods.

This is also a consumer business, hence monthly revenue is an important metric.

The key e-commerce startup business model metrics are:

  • Monthly Revenue – total revenue in a given month. This is not recurring because consumers can just buy goods one-off.
  • Revenue CMGR – compound monthly growth rate. Implied compounded monthly net revenue growth rate between two disparate months. [CMGR= (latest month net revenue)/first month net revenue*(1/#of months)-1].
  • Gross margin – Gross profit in a given month/total revenue in the same month (gross profit equals sales less cost of sales and goods sold). Gross margin should be tracked by an e-commerce business from day one because you’re either making the goods or sourcing it in your name. Therefore, this metric helps to understand what is the cost to the business and hence to be able to make profit on a by-product basis. And also because it is not a recurring transaction, you want to be able to make money per transaction basis.
  • Paid CAC- Cost per customer acquired through paid marketing channels (total sales and marketing spent in a given month/total customers acquired via paid channels including via sales in a given month).
Startup business model metrics

Common e-commerce startup business model metrics mistake to avoid:

  • Gross profit – not accounting for all costs. That is, falling to break down all costs included and those excluded in the gross profit calculations – net margin of all costs. Net margin x high volume is a good metric to use for future investments.

Advertising startup business model metrics

An advertising startup company offers a free service to consumers and derives revenue entirely, or predominantly from advertisers.

Common advertising companies include social networks and content sites e.g. Snapchat, Twitter, Reddit. An advertising model is really only about the users.

Key advertising startup business model metrics are:

  • Daily Active Users (DAU) – total number of unique users active in a 24-hour day, averaged over a given period of time.
  • Monthly Active Users (MAU) – total number of unique users active at least once in the last 28-days.
  • Percent Logged-In – total monthly active users with a registered account (logged-in) divided by the total unique visitors (inclusive of logged-in and logged-out) during the same 28-day window.

Common advertising startup business model metric mistake to avoid:

  • Not defining what “active” means in the context of your business. You should define what active mean in the context of your business.

Hardware startup business model metrics

A hardware startup company sells physical devices to consumers or businesses. For example, gaming platforms e.g. Playstation, Xbox and indoor and outdoor kiosk-type apps.

The hardware startup model is very similar to e-commerce.

The key hardware startup business model metrics are:

  • Monthly Revenue – total revenue in a given month. This is not recurring because consumers can just buy goods one-off.
  • Revenue CMGR – compound monthly growth rate. Implied compounded monthly net revenue growth rate between two disparate months. [CMGR= (latest month net revenue)/first month net revenue*(1/#of months)-1].
  • Gross margin – Gross profit in a given month/total revenue in the same month (gross profit equals sales less cost of sales and goods sold). Gross
  • margin should be tracked by an e-commerce business from day one because you’re either making the goods or sourcing it in your name. Therefore, this metric helps to understand what is the cost to the business and hence to be able to make profit on a by-product basis. And also because it is not a recurring transaction, you want to be able to make money per transaction basis.
  • Paid CAC- Cost per customer acquired through paid marketing channels (total sales and marketing spent in a given month/total customers acquired via paid channels including via sales in a given month).

Common hardware startup business model metrics mistake to avoid:

  • Gross profit – not accounting for all costs. That is, falling to break down all costs included and those excluded in the gross profit calculations – net margin of all costs. Net margin x high volume is a good metric to use for future investments.


Reference

Y Combinator