[lwptoc] Before scaling, you need to ensure that your processes and procedures within your business are working optimally. If your startup is not operating like a well-oiled machine can cause havoc when you begin to scale.
The Ultimate Key Performance IndicatorYour north star metric is your company’s guiding light and is the Ultimate Key Performance Indicator. Your north star is a purpose-driven metric. What is the vision of your startup? Where do you want to be? Perhaps you want to be acquired by a major player in the market. Every decision made in your company should contemplate whether it will move you further toward your north star or further away. The north star metric is the simplest and most important metric that your startup needs to regularly monitor. If you have not defined your north star metric, do it as early as possible, share it with your team, your customers and incorporate it into your company’s policies and procedures.
Client ActivityYou must ensure that you are across all your company metrics when you are preparing to scale and when in the process of scaling. Let us look at some of the most important metrics and how you can put systems in place, which will allow you to monitor and measure performance.
Conversion RateConversion rates can apply to a variety steps within the customer journey. During the Scale stage, you should be optimising your conversion rates of those KPIs and understand what conversion rates you require to drive your company forward. For example, when someone registers to download your free report at the first step of the customer journey, it is a download conversion. If there are 100 people that click on the ad and 10 people download the report, it results in a 10% conversion rate. Where a salesman then calls those 10 people and sells one product, it results in a 10% sales conversion rate. One relates to marketing and the other relates to sales. Once you know these numbers, it makes it a lot easier to scale, because these numbers help you forecast and set goals.
Customer Retention RateWhile it is important to gain new customers, keeping them is another story. The customer retention rate is the rate at which you can retain customers. Your retention rate will help you determine how useful your product is to customers and whether your product is meeting their wants and needs. If your customer retention is poor, it usually relates to poor product-market fit. Many would also argue a poor customer retention rate could also mean that clients do not understand how to use your solution or there is poor customer service. This could mean that you need to create better tutorials or update your user-interface to make it more user-friendly. If you are experiencing low customer retention rates, or you simply want to boost them, then you must ask your customers for feedback. Also, you should ask the customers who left, why they did so. See what their concerns are and how your product can be improved to make it more useful.
Customer Acquisition CostKnowing the cost of getting a new client is critical in business – this is known as your customer acquisition cost (CAC). Obviously, you must keep CAC as low as possible. Many founders are unable to provide you with this number. Believe me, it is one of the first metrics that your investors will ask you, as it closely affects your profit margin. CAC is calculated by taking the total company expenses over a given period and dividing the total number of customers over the same period. For example, last month your total company expenses including wages, advertising costs and operating expenses were $10,000. Over the period you gained 20 clients. Your CAC would, therefore, be $500. Not bad if the product or service you are selling is $5,000. Obviously not so good if it was $1,000 – unless you have a high Customer Lifetime Value.
Customer Lifetime ValueThe customer lifetime value (CLV) is a metric that measures on average how much each client spends with your company over their life. Knowing your customer lifetime value can help you make intelligent company decisions. For example, if you are achieving a CLV of $12,500 then will be better placed to establish an accurate marketing budget or perhaps you may decide that you want to increase CLV by improving your customer service by adding new support staff.
Burn RateI have heard about all kinds of fancy and overcomplicated explanations that describe burn rate. Burn rate is the rate at which your company is burning through money. Burn rate is the simplest metric to calculate. You simply choose a period. Let us say quarterly and take the starting balance at the start of the quarter and minus the balance at the end of the quarter and divide by the number of months, which is in this case, 3. For example, your company’s balance sheet shows $100,000 at the start of the January quarter and $70,000 at the end. Therefore, there is a loss of $30,000. If you divide $30,000 by 3 (number of months in the quarter), the burn rate is $10,000 per month.
Churn RateChurn is the rate at which clients leave. Therefore, you need to ensure that your churn rate remains low. If your churn rate is high, then there is likely something wrong with your product or service that needs to be fixed. Churn rates can be calculated over various time periods. The earlier stage your startup is, the shorter the period that you should measure. As you know, all things must be measured closely when your startup is finding its feet. Most startups calculate churn on a monthly basis. Churn considers current clients, new clients and the ones that leave over the month period – or another period that you nominate. To calculate churn rate:
- Current customers as at the start of period + new customers at end of period = Total Clients
- Total Clients – Clients that Left as at end of period = Clients
- Clients / Clients that Left = Churn Rate.