Key Financial Metrics Every Startup Should Track

From MRR to ARR to CAC and LTV, every startup should be familiar with various metrics that help track and monitor growth, efficiency and return on investment. These metrics shouldn’t just be calculated to measure a singular point in time, but at regular intervals to gauge trends and overall business health.

Regularly tracking various key metrics has wide-ranging benefits for your startup. Not only will it help evaluate your startup’s overall health, but it can also help build trust with investors. See this recent webinar for more information on key financial metrics your startup should familiarize itself with or read on for more information about what these specific metrics can help measure and how to put them into action for your startup.

Why the Right Metrics Matter More Than Ever

Metrics can largely be broken down to help your startup define three different aspects of its operations: its growth, efficiency and ROI.

For instance, tracking month-over-month MRR, net revenue retention and churn rate are all growth metrics that can help serve as a snapshot of your startup’s financial health and help determine resource allocation. Metrics such as burn multiple and ARR per headcount are essential to knowing how efficiently your startup is operating, while CAC, LTV, LTV:CAC ratio and ROAS all help measure ROI.

Beyond helping evaluate for growth, efficiency and ROI, metrics can help your startup tell its financial story when working with investors. Having a strong financial literacy can also inspire more investor confidence during fundraising rounds to secure funding.

Growth Metrics: Driving Top-Line Expansion

So what are some of the key growth metrics that your startup should be sure to know? Here’s an overview of the top key performance indicators you want to know and why they’re so important for assessing sustainable growth:

• Month-over-month MRR: This metric measures how much your startup’s recurring revenue changes every month. Commonly utilized by SaaS startups, it can help startups better determine their overall financial health, stability and growth trajectory.
• Net revenue retention: Net revenue retention, or NRR, measures revenue over a specific period and can help your startup determine its growth potential from its current base of customers. NRR considers additional revenue gained through upselling, cross-selling and upgrades, and also factors in churn.
• Churn rate: Churn rate is the percentage of customers that stop using your startup’s service over a period of time. Ideally, you want to have a low churn rate. A high churn rate indicates that you’re losing a significant number of customers.

Month-Over-Month MRR Growth

Month-over-month MRR growth is easy to calculate. The formula is as follows:

• Simply subtract your startup’s previous monthly recurring revenue from the current MRR. Then, divide that number by the previous month’s MRR and multiply it by 100.

A higher MRR is better and means that you’re seeing more significant growth. For startups, a good month-over-month MRR is typically anywhere from 5 to 15 percent. If you’re an early-stage startup, shoot for around 20 percent.

Aside from month-over-month MRR, there are a few other types of MRR that you should be familiar with. They include:

• New MRR, which is any revenue from new customers
• Expansion MRR, which is additional revenue gained from current customers (usually from upselling or add-ons)
• Churn MRR, which is lost revenue from discontinued business

Net Revenue Retention & Churn

Studies indicate that it’s up to 25 times more expensive to acquire a new customer than it is to retain an existing customer. Noting this, net revenue retention (NRR) becomes an important metric to track as it measures revenue retained from existing customers.

• NRR = (Starting MRR – Contraction MRR – Churn MRR + Expansion MRR) / Starting MRR x 100

Churn can be a real NRR killer, as it directly reduces the money retained from current customers. This underscores the importance of enacting the right churn mitigation strategies.

What’s a good NRR for your startup? Try to shoot for one that’s at or above 100 percent. This is indicative of a growing company that retains more revenue than it loses.

Efficiency Metrics: Making the Most of Every Dollar

The second main category that metrics fall into is the efficiency bucket. Some of the key valuable insights to know that matter to your startup’s overall efficiency include:

• Burn multiple: The burn multiple measures the efficiency of how your startup is using its cash to generate revenue. It can help startup leadership know how much money they’ll need to become profitable.
• ARR per headcount: This is determined by taking your startup’s annual recurring revenue and dividing it by your total number of employees. The higher your ARR per headcount, the better.

Burn Multiple

Ideally, your startup should strive for a burn multiple of less than 1, which indicates that you’re generating more revenue than you’re spending. A burn multiple of 1 means you’re breaking even and if this metric is greater than 1, you’re spending more than you’re earning. Monitoring this metric closely can help ensure better cash flow management and a decrease in monthly expenses.

Determine your startup’s burn multiple by using the following formula:

• Divide your net burn by your net new ARR

ARR per Headcount

A high ARR per headcount bodes well for your startup and for how well your employees are performing, while a low number may indicate the need for better resource allocation. Understanding this metric can provide insight into the average revenue generated per employee.

The formula for determining your startup’s ARR per headcount is as follows:

• ARR per headcount = Total ARR / total number of employees

ROI Metrics: Proving the Value of Every Investment

The final major category of metrics your startup should know and track involves its ROI. Some of these include:

• CAC: Customer acquisition cost (CAC) measures the total cost of acquiring a new customer.
• LTV: Customer lifetime value is the revenue your startup can expect from just one customer over the entire span of your relationship with them.
• LTV:CAC ratio: This compares the lifetime value you can expect from a customer versus the amount you spend to acquire the customer.
• ROAS: Revenue on ad spend assesses the revenue you’ve earned as a result of advertising versus the amount of money you spend on the specific ad campaign.

These metrics all help show how effectively your startup can convert positive cash flow into revenue growth through informed decisions.

CAC, LTV, and LTV:CAC

To generate revenue, you need to acquire customers. Then, once you earn a customer, you have to do your best to retain them.

One of the most important metrics for your startup to track is the LTV: CAC ratio, which measures the lifetime value you can expect to earn from customers acquired versus the cost that it was to acquire them via advertising and marketing efforts. Generally, you want this ratio to be at least 3:1, which demonstrates that you’re earning three times the value from your customers that you’re spending to earn them.

Return on Ad Spend (ROAS)

ROAS is the revenue that you’ve earned from any advertising spend divided by the cost of your ad campaign. This can help leadership assess what types of advertising are most effective for planning purposes.

Generally, startups should shoot for a 4:1 ROAS, which indicates you’re earning $4 for every $1 spent on advertising.

Keeping an Eye on Trends, Not Just Snapshots

To get the most out of your metrics, it’s best to track and observe them in the context of change over time — and not just as single data points. Remember, your data points should be assessed on both a month-to-month basis and quarterly basis.

Additionally, if you’re presenting these metrics to investors, consider including visual elements to display them, such as graphs or dashboards. Make sure you’re showing the complete picture of your graphics and not just cherry-picking certain months. This can help build investor confidence.

How Transparency Builds Investor Confidence

To build investor confidence, it’s important to be transparent and straight up with your funding partners. Provide full context around metrics that you’re presenting and don’t cherry-pick which data you show. Make sure you’re showing metrics that are positive and ones that indicate some challenges. This can foster credibility.

Put Metrics into Action

For more information on the key metrics that your startup should know and track, and for help determining and tracking these metrics, consider seeking financial guidance from a trusted partner like Graphite. Our range of financial offerings includes fractional CFO services and assistance setting you up with an advanced analytics platform to track metrics in real-time. Contact us today for more information and to schedule a consultation.

FAQs

How often should I update these metrics to keep them meaningful?

How often you update your metrics largely depends on your startup and what metrics you’re tracking. Some metrics, like month-over-month MRR and net revenue retention, should be assessed and updated on at least a monthly basis based on what they’re designed to measure. Other metrics, like ARR per headcount, can be updated more infrequently, typically on a quarterly or annual basis.

Which metrics are most crucial for a pre-revenue startup?

There are lots of metrics that you should be reviewing if your startup has yet to earn revenue. Some of the most critical ones include CAC, CLV and conversion rate.

Are there industry-specific benchmarks for burn multiple and LTV:CAC?

Ideally, your startup should strive for a burn multiple of less than 1, which indicates that you’re generating more revenue than you’re spending. Additionally, you want the LTV:CAC ratio to be at least 3:1, which demonstrates that you’re earning three times the value from your customers that you’re spending to earn them.

How do I track churn effectively if I have multiple product lines or pricing tiers?

If you have multiple product lines and pricing tiers, be sure to track churn on all of them to determine customer retention.

What’s the best way to present metrics to investors in pitch decks or board meetings?

It all starts with selecting the right metrics to present and then doing your best to tell a financial story around your metrics that can help portray any successes or communicate your startup’s potential. Some metrics that you’ll likely want to include are month-over-month MRR, burn multiple, CAC and LTV.

How can automation tools help ensure accurate and timely metric reporting?

Automation tools can help streamline mundane tasks to give you more of a real-time look into your financial metric reporting. Another nice thing about automation is that it can reduce the risk of human error so you can ensure the information you’re presented with is accurate. Automation can also help standardize and organize data.