Real Customer Metrics for Your Startups
To learn more about the customer metrics you should be measuring for your startup watch this presentation now on YouTube.
One of the biggest challenges that startups face is knowing where they are in their journey. Identifying the right metrics to assess the health of your company rather than relying on vanity metrics, is vital to understanding where to focus your energies and how to build your timeline for growth.
There are two metrics that will aid you as much as any other in gauging your startup’s wellbeing.
- Net growth
- Product market fit
Achieving positive net growth and a strong product market fit, places you in the magic quadrant for your startup. Product market fit is also accounted for by your ability to retain customers.
Conversely, negative net growth coupled with uncertain product market fit might see your startup go into a “death spiral”. There are other combinations, also. If you have a positive net growth, but weak retention, you can keep working as a “leaky bucket”, spending a lot of money for customer acquisition to keep your business afloat.
Finally, strong retention, with negative net growth indicates a declining space for your startup, which could mean the end of the line for one of your products or just that you’re in a small market. You can be a good niche player, with strong retention in your specific market, but that puts you in different league than the traditional unicorns.
There are three stages to achieving positive net growth and the retention that comes from good product market fit.
- Acquiring customers
- Activating customers
- Retaining customers
Customer acquisition concerns the cost to your startup of gaining new customers. What is the mix of tools and media that you need for this? Customer acquisition cost includes every amount expended to bring new customers to your product or service, divided by the amount of customers that you have.
Acquisition costs will vary depending on whether you’re a B2B or B2C company. B2B companies tend to have a longer sales cycle, facing multiple stakeholders. In contrast, B2C companies spend heavily on social media marketing to reach consumers directly. Establishing a cohesive narrative and consistent messaging across all media will help reduce your acquisition costs. Find where your customers are and reach them there. Develop an integrated marketing strategy to maximize your messaging.
Bringing new customers to your company is only the first part. You need to convert them into users or purchasers of your products and services. You need to convince them of the advantages of your offering over your competitors’. The best way to do this is to define what being a daily active user (DAU) means for your business. For example, for Microsoft Teams, we define DAU as “the maximum daily users performing an intentional action in the last 28-day period across the desktop client, mobile client and web client.”
This is a key metric for you to establish and then benchmark repeatedly as it will help you understand the goals you have for your customers which will serve them but also maintain your business. You will want to look at every landing page you have and determine whether it is doing its job correctly and driving customers through a conversion funnel effectively.
Retaining customers is the metric you should use to determine whether customers are willing to repeat the intended action on your platform. Do customers return and how engaged are they with your product or service?
Part of your ability to retain customers will arise from the experience they had the first time they used your service or purchased from you. Your goal should be to reduce friction for new users whether it’s in opening a new account, creating a new profile, or accessing your service. If something prevents users from completing an action they will bounce from your site and probably not return.
Retention rates will fluctuate as you test out different features and approaches. At first you will see high take up at product launch followed by a dip as users drift away. As you iterate towards product market fit, your users will become more loyal and retention will increase again. Tracking retention over time often creates a “smile” effect in your graph as you achieve product market fit.
When you have a handle on customer retention you can really start to measure your net growth by using the quick ratio. This is a popular metric from the SaaS world for comparing the number of new and returning users to the number of lost users in any given month. A returning or resurrected customer is one that didn’t make a purchase in the previous month but had purchased at some earlier time. It’s important to distinguish between new customers and returning customers to measure the cost of acquisition more accurately.
Measuring lost customers or your company’s churn rate is also key to understanding your position in the market and where you need to place your focus.
There are many tools for calculating your quick ratio as a daily metric, but the simplest may be Excel. It will help you understand how you are growing over time and how the decisions you make are impacting your business.
Mariano Amartino is Microsoft Startups Director for the Americas. Previously Mariano was founder and CEO of Hipertextual helping it become one of the leading blog networks in the Spanish language.