Whether you are running a company, driving a car or flying a jet you need a dashboard to tell you how you are doing. One of the most common mistakes is to fill up your dashboard with dozens of metrics covering every aspect of your business. The problem with this “kitchen sink” approach is that it is actually harder to understand how your business is doing. With a dozen different metrics, most days half of them will be up and half will be down – so how are you doing?
Focus on the fewest number of metrics that will allow you to understand how your business is doing. For example, I typically suggest companies use the following five metrics as their dashboard:
- Customer Acquisition. How many new customers are you adding every day (or week or month)? This is an important measure of how healthy your marketing efforts are working since this is the top of your conversion funnel. Depending on your business this may be new registrations, first time purchasers or application installs.
- Customer Engagement. How active are your customers? Just because you acquired them does not mean your customers are active and using your service. Do they use the product every week? day? hour? If your customers aren’t using your service then it’s only a matter of time before they churn out and are no longer a customer so this is your most important metric.
- Customer Retention. How long does someone stay a customer? This is critical to understanding your business model because this allows you to model customer churn. If it costs you $5 to acquire a user but they only stick around long enough to make you $2, then your business is upside down. The higher your customer retention, the easier it will be to grow your business.
- Revenue. How much money do you make every month? Focusing on daily or weekly revenue can be very noisy so for running your business focus on monthly revenue. In some cases, it might be more useful to measure revenue per customer in order to calculate a customer lifetime value.
- Cost. There are two kinds of cost you might want to measure, depending on your type of business. Burn rate is how much money you spend every month on everything including salaries, rent and services. Customer acquisition cost (CAC) is how much you are spending to acquire every new user. If CAC dominates your costs then you should measure that, otherwise use the overall burn rate.
You will find that you cannot improve what you do not measure, but you will focus on improving whatever you do measure. If you can maximize acquisition, engagement, retention, revenue and cost you will have a very healthy business on your hands.
These five example metrics might not work for your company, but I bet there are five that do. Think about it and choose them carefully, they will be your guide through rough seas.
Great post! I have found that the Pirate Metrics ‘AARRR’ is really powerful, and is basically consistent with your post. All the metrics are important, but depending on the stage of your company you might be focusing on some of them more than others…..
I agree. I have seen that companies that focus on only one or two metrics early on have trouble expanding to 5 when the time comes. Have you seen that as well?
Well, I think there is usually an order that makes sense, and following that order is the hard part. In other words, customer acquisition isn’t a good use of resources before you have an engaging product to welcome them into. Depending on the business model, revenue focus might come earlier or later. That type of thing…
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