Day 4
Learning Your Metrics
Feb 10
Oleg Bilozor, Founder and CEO at Reply.io, explains why metrics are important for each and every founder, about universe metrics for investors, and what is the North Star Metric for Reply.io. Oleg used some templates which are available for participants of the Startup Recharge Programme here.
20 min to read
What Are Business Metrics?
Business metrics are benchmarks indicating how well your company performs on various scales, from marketing to sales and beyond. Having a working knowledge of these various measurements is a cornerstone of holistic business intelligence. Tracking business metrics gives you data you can use to improve your project management and business processes, direct marketing efforts, assess your company’s financial performance, and increase your sales. These quantifiable metrics help you set goals and achieve them.
What’s the difference between a metric and a measure?
A measure is a fundamental or unit-specific term. A measure is a number that can be used in calculations, like sum, count, or average.
A metric is derived from one or more measures. Metrics have a goal or performance behind. This difference becomes clear when metric becomes “business metric,” and thereby becomes a quantifiable measure that is used to track and assess the status of a specific business process.
Why are metrics important?
Metrics measure your business processes. Metrics are standardized so they are comparable to other metrics in your business. In a data context, measures are the numbers or values that can be summed and/or averaged, such as sales, leads, distances, durations, temperatures, and weight. The term is often used alongside dimensions, which are the categorical buckets that can be used to segment, filter or group—such as sales rep, city, product, colour and distribution channel.
Key performance indicators drill down into a key area, whereas metrics are a way of measuring the overall performance.
4 Types of Business Metrics
Business metrics enable you to track your company’s performance in real time. Here are four general types of such benchmarks:
How to measure metrics
Sometimes a single metric becomes an obsession for management, overemphasized at the expense of other signals, and eventually skewing behavior. In recent years, there have been examples in multiple consumer service segments of organizations becoming excessively focused on the number of services per customer. This metric is not useless—a customer’s willingness to buy multiple services can be a sign of a healthy business. But in situations where it becomes the only number that matters, without an appropriate balance toward customer advocacy, frontline staff have in some cases worked to boost that cross-sell metric at the cost of corroding the company’s trust and relationship with its customers.
Some metrics reflect only part of a company’s performance, missing other significant elements. A call center that tracks customers’ average hold time is fine, but tallying the percentage of problems resolved on the first call may capture something much more important.
Click-to-revenue analytics, a popular feature of “performance marketing,” is another example. These numbers are far more meaningful when combined with measures like brand value, how marketing spending is affecting that value and how much company revenue can be directly traced to marketing efforts. While harder to measure than clicks, these are invaluable metrics.
Too often, measurements emphasize activity that just doesn’t add value. One example: a research and development organization measuring raw developer output, such as the number of lines of code written, regardless of the quality of the code.
Measuring sales performance can be especially tricky. Revenue per sales rep, a common metric, is easily inflated by marketing spending and price discounts, but just as problematic is the fact that not all revenue is of equal value. Companies that sell a portfolio of products of varying profitability, as most do, need to acknowledge that some revenue brings more profit. At the same time, a company may want to incent sales from a new territory or customer that are harder to get than renewals from an existing account, but valuable in the long term.
For many years, one software company counted all revenue equally when calculating sales quota attainment. This resulted in no differentiation between revenue for the software itself, which was quite high margin, and the professional services the company offered to implement the software, which had very low or even negative margins. The company eventually fixed that issue by carefully evaluating its gross margins per product and moving to quotas keyed off of those numbers.
Some metrics are simply poor quality. Consider sales projections, which feed the broader business forecasts that CFOs make every quarter and are vitally important to a company’s future health. Yet many sales organizations rely on reps’ self-reporting, a metric that can be of suspect quality. Today, more-sophisticated companies use digital exhaust to stress test those predictions. It is possible to discern through email traffic and calendar analysis the frequency of interactions with a key customer in the sales pipeline, for example. In the weeks before the end of a quarter, if this exhaust shows no meaningful interactions with the customer, it might be prudent to discount the probability of the sales that have been projected to that customer. It could be wise to do the same for other opportunities that the sales team is also characterizing as highly probable.
North Star Metric
A North Star Metric (NSM) is the source of truth that shows your business is meeting the expectations of both your customers and your executives. The right NSM is an essential part of your product strategy as it defines the relationship between the painpoints your product solves and sustainable, long-term business growth.
To be a “North Star”, the metric must:
But that’s not all. Focusing on your NSM should, in turn, boost other key business metrics like customer retention and subscription revenue. It’s the one thing that if it grows, your business will too.
Depending on your business and product road map, you might have multiple North Stars to follow. And each one will potentially have other sub-metrics and leading indicators that tell you you’re on the right path.
The goal of a North Star Metric isn’t to replace all of your data and reports. It’s to give everyone a direction to aim their efforts towards.
Companies use North Star Metrics to get teams, stakeholders, and clients all on the same page.
With so much data, measuring real progress can quickly get complicated. When your team’s focus on different data points, they end up chasing different goals. And when teams set different goals they often end up working against each other instead of collaborating.
The idea behind the North Star Metrics is to align team members, simplify meetings, lower time spent on administration, and help businesses focus on sustainable growth.
Here are three of the main reasons why North Star Metrics are essential to your growth and success:
1. North Star Metrics align business and customer success
A North Star Metric gives the whole company a central goal to focus on.
Instead of getting lost in team-specific goals (like customer success, sales, or technical goals), everyone needs to be able to answer: How does our work impact the North Star Metric? If they can’t answer it, they need a new goal.
2. Gives you company-wide focus
There’s always lots you could focus on. Usually, the problem is prioritizing what’s most important now. A NSM gives your entire company a clear direction to place their focus. And that’s a powerful tool. The same goes for your business and product. Where you end up depends on where you place your attention.
3. Provides transparency about what’s important
A North Star Metric also gives everyone clarity about how the business is doing overall. It can help your team see the bigger picture as opposed to getting stuck in the smaller details. Transparency is critical to your success. Teams need to know how their work impacts the company’s goals in order to set better project objectives and follow OKRs. And the more they can connect what they do to a North Star Metric’s growth, the more motivated they’ll be to work.
What metrics says to investors
We asked several angel investors and fund managers about metrics they look for when making a decision to invest. Below is the list of those metrics:
Gross Margin
A company’s gross margin tells investors how expensive it is to offer their services or products on average. Since the gross margin is expressed as a percentage, this boils down the useful information to a single number rather than a dollar amount that I then have to compare against total sales revenue and other factors.
To find the gross margin, investors take the total sales revenue for a given business, subtract how much it costs to make any goods or services sold, then divide that by the total sales revenue. This essentially tells them how big the gap is between what a company sells and what it spends to make those sales.
The bigger the number, the more profitable the company is in theory.
MRR: Monthly Recurring Revenue
A company’s monthly recurring revenue gives investors a good idea about how much they earn every month, rather than in a snapshot format. Sometimes new companies have excellent months as a result of extensive marketing campaigns, and then sales drop off a cliff due to a lack of follow-up or other factors.
By looking at a startup’s MRR, investors can see if their success is consistent and likely to stay the same, or if it’s more of a fluke and they need to look elsewhere. If you want investors’ attention, try to get your MRR up as high as you can.
Revenue Growth
Revenue growth is also fairly self-explanatory, though some business students will recognize it as the “top line” for a company.
It’s a metric that shows the expansion potential or growth potential for a given business. In a nutshell, it illustrates increasing and decreasing sales over a set timeframe (usually a number of months or years). Investors usually try to find the revenue growth for a particular company using the timeframe when they reached their maximum productive potential given their available resources.
In other words, investors look at how much a company’s revenue has grown once all of its gears are turning and it is in full production. That gives the company a fair shake, as executives can’t say that they didn’t have all their product available or their infrastructure working at the time.
More importantly, looking at the revenue growth allows investors to identify trends that may affect a company or even an entire industry.
Net Income
This is most often referred to as the “bottom line” or “burn rate”. A company’s net income is simply its total earnings. You calculate it by adding all of the costs for running the company, including taxes, interest, depreciation on property or infrastructure, the cost to develop products or services, employee wages, and anything else, then deducting that from the total revenue amount.
What’s left should theoretically be positive (unless the company is heavily in debt). This tells investors how well the company is managing its expenses versus its profits. But a negative number isn’t necessarily a “no-go”.
Indeed, lots of startups remain heavily “in the red” (that is, they operate in debt) for the first few years of business.
Customer Acquisition
A company’s customer acquisition metric is, put simply, how much it costs to attract new customers to that business. It’s true that across industries it’s almost always cheaper to retain existing customers than it is to attract new customers, but you can’t really avoid acquiring new customers if you want to grow and expand.
This means companies must spend money to produce more of their product or service, upgrade that product or service, or expand what they offer in order to draw in new users or consumers.
Another good way to think of this metric is the CAC or “cost of acquiring a customer”.
How much money a company needs to spend, however, is heavily dependent on management, business plans, and other factors. If they see that it costs a company less to acquire new customers, they’ll be impressed. The reverse is true if it almost bankrupts a company to acquire new customers and reach its expansion goals.
Churn Rate
The churn rate for a company is a simple metric that boils down the total revenue potential for each customer. It refers to how quickly you “churn” through your customers – it indicates how quickly you burn through your customers and they stop giving you money.
Remember, it’s almost always cheaper to keep existing customers. But this being said, there are some businesses and industries where it’s almost impossible to get repeat customers, at least for the short term.
Specifically, investors will look to see if your churn rate exceeds your number of new customers or the reverse. Investors will be impressed if your new customer rate exceeds your churn rate – this indicates that you bring on more customers faster than you lose them.
As a side note, investors may also look at the ARPU or average monthly revenue per customer when determining whether a company’s churn rate actually exceeds its customer revenue or vice versa. Sometimes, companies with particularly high ARPU metrics can also have a high customer churn rate but still be worthwhile given how much money each individual customer brings in.
Revenue Per Employee
Another effective metric investors can use to see whether a given investment is a good idea is the revenue per employee. As the name suggests, this allows investors to see how efficient a business is when it comes to using their employees, and whether or not it’s inundated with too many employees or the reverse.
If a company has a high revenue per employee metric, that means that each employee produces a ton of value and that there may even be an argument to hire more employees in the future.
On the flip side, if a company has a low revenue per employee metric, that means either too many people are working or the employees currently working aren’t producing a ton of value by themselves.
We used materials from BAIN, Jonathan Hung, Plan.io.
What Are Business Metrics?
Business metrics are benchmarks indicating how well your company performs on various scales, from marketing to sales and beyond. Having a working knowledge of these various measurements is a cornerstone of holistic business intelligence. Tracking business metrics gives you data you can use to improve your project management and business processes, direct marketing efforts, assess your company’s financial performance, and increase your sales. These quantifiable metrics help you set goals and achieve them.
What’s the difference between a metric and a measure?
A measure is a fundamental or unit-specific term. A measure is a number that can be used in calculations, like sum, count, or average.
A metric is derived from one or more measures. Metrics have a goal or performance behind. This difference becomes clear when metric becomes “business metric,” and thereby becomes a quantifiable measure that is used to track and assess the status of a specific business process.
Why are metrics important?
Metrics measure your business processes. Metrics are standardized so they are comparable to other metrics in your business. In a data context, measures are the numbers or values that can be summed and/or averaged, such as sales, leads, distances, durations, temperatures, and weight. The term is often used alongside dimensions, which are the categorical buckets that can be used to segment, filter or group—such as sales rep, city, product, colour and distribution channel.
Key performance indicators drill down into a key area, whereas metrics are a way of measuring the overall performance.
4 Types of Business Metrics
Business metrics enable you to track your company’s performance in real time. Here are four general types of such benchmarks:
- Financial metrics: Things like cash flow, cost of goods, and liquidity provide the backdrop to many important business decisions. You need to accurately assess your current financial situation and forecast where it will be in the future. Financial business metrics can help you do this.
- Marketing metrics: Your business strategy likely includes digital marketing efforts. Marketing metrics allow you to track things like your conversion rate (how often people click on or purchase things online from you) or the sort of traffic your ads generate in general. Keeping an eye on these measurements helps you calibrate when a marketing campaign is working and when it needs improvement.
- Performance metrics: Companies need to gauge how they’re performing internally. Business performance metrics accomplish this in myriad ways: They can provide data about employee satisfaction to human resources departments, track the efficiency of business operations, or assess whether automation might be necessary.
- Sales metrics: Companies need to determine how well they’re meeting their business goals in total sales revenue. Sales metrics enable you to track the total number of new products you’ve sold and your overall sales growth rate. They can also help you better understand how customer satisfaction (or the lack thereof) affects your customer retention rate. For example, if a SaaS company (or a “software as a service” company) sales team notices a drop in subscriptions, the sales staff can comb through data with the marketing team to learn why this might have happened.
How to measure metrics
Sometimes a single metric becomes an obsession for management, overemphasized at the expense of other signals, and eventually skewing behavior. In recent years, there have been examples in multiple consumer service segments of organizations becoming excessively focused on the number of services per customer. This metric is not useless—a customer’s willingness to buy multiple services can be a sign of a healthy business. But in situations where it becomes the only number that matters, without an appropriate balance toward customer advocacy, frontline staff have in some cases worked to boost that cross-sell metric at the cost of corroding the company’s trust and relationship with its customers.
Some metrics reflect only part of a company’s performance, missing other significant elements. A call center that tracks customers’ average hold time is fine, but tallying the percentage of problems resolved on the first call may capture something much more important.
Click-to-revenue analytics, a popular feature of “performance marketing,” is another example. These numbers are far more meaningful when combined with measures like brand value, how marketing spending is affecting that value and how much company revenue can be directly traced to marketing efforts. While harder to measure than clicks, these are invaluable metrics.
Too often, measurements emphasize activity that just doesn’t add value. One example: a research and development organization measuring raw developer output, such as the number of lines of code written, regardless of the quality of the code.
Measuring sales performance can be especially tricky. Revenue per sales rep, a common metric, is easily inflated by marketing spending and price discounts, but just as problematic is the fact that not all revenue is of equal value. Companies that sell a portfolio of products of varying profitability, as most do, need to acknowledge that some revenue brings more profit. At the same time, a company may want to incent sales from a new territory or customer that are harder to get than renewals from an existing account, but valuable in the long term.
For many years, one software company counted all revenue equally when calculating sales quota attainment. This resulted in no differentiation between revenue for the software itself, which was quite high margin, and the professional services the company offered to implement the software, which had very low or even negative margins. The company eventually fixed that issue by carefully evaluating its gross margins per product and moving to quotas keyed off of those numbers.
Some metrics are simply poor quality. Consider sales projections, which feed the broader business forecasts that CFOs make every quarter and are vitally important to a company’s future health. Yet many sales organizations rely on reps’ self-reporting, a metric that can be of suspect quality. Today, more-sophisticated companies use digital exhaust to stress test those predictions. It is possible to discern through email traffic and calendar analysis the frequency of interactions with a key customer in the sales pipeline, for example. In the weeks before the end of a quarter, if this exhaust shows no meaningful interactions with the customer, it might be prudent to discount the probability of the sales that have been projected to that customer. It could be wise to do the same for other opportunities that the sales team is also characterizing as highly probable.
North Star Metric
A North Star Metric (NSM) is the source of truth that shows your business is meeting the expectations of both your customers and your executives. The right NSM is an essential part of your product strategy as it defines the relationship between the painpoints your product solves and sustainable, long-term business growth.
To be a “North Star”, the metric must:
- Result in revenue
- Reflect customer value
- Evaluate progress
But that’s not all. Focusing on your NSM should, in turn, boost other key business metrics like customer retention and subscription revenue. It’s the one thing that if it grows, your business will too.
Depending on your business and product road map, you might have multiple North Stars to follow. And each one will potentially have other sub-metrics and leading indicators that tell you you’re on the right path.
The goal of a North Star Metric isn’t to replace all of your data and reports. It’s to give everyone a direction to aim their efforts towards.
Companies use North Star Metrics to get teams, stakeholders, and clients all on the same page.
With so much data, measuring real progress can quickly get complicated. When your team’s focus on different data points, they end up chasing different goals. And when teams set different goals they often end up working against each other instead of collaborating.
The idea behind the North Star Metrics is to align team members, simplify meetings, lower time spent on administration, and help businesses focus on sustainable growth.
Here are three of the main reasons why North Star Metrics are essential to your growth and success:
1. North Star Metrics align business and customer success
A North Star Metric gives the whole company a central goal to focus on.
Instead of getting lost in team-specific goals (like customer success, sales, or technical goals), everyone needs to be able to answer: How does our work impact the North Star Metric? If they can’t answer it, they need a new goal.
2. Gives you company-wide focus
There’s always lots you could focus on. Usually, the problem is prioritizing what’s most important now. A NSM gives your entire company a clear direction to place their focus. And that’s a powerful tool. The same goes for your business and product. Where you end up depends on where you place your attention.
3. Provides transparency about what’s important
A North Star Metric also gives everyone clarity about how the business is doing overall. It can help your team see the bigger picture as opposed to getting stuck in the smaller details. Transparency is critical to your success. Teams need to know how their work impacts the company’s goals in order to set better project objectives and follow OKRs. And the more they can connect what they do to a North Star Metric’s growth, the more motivated they’ll be to work.
What metrics says to investors
We asked several angel investors and fund managers about metrics they look for when making a decision to invest. Below is the list of those metrics:
Gross Margin
A company’s gross margin tells investors how expensive it is to offer their services or products on average. Since the gross margin is expressed as a percentage, this boils down the useful information to a single number rather than a dollar amount that I then have to compare against total sales revenue and other factors.
To find the gross margin, investors take the total sales revenue for a given business, subtract how much it costs to make any goods or services sold, then divide that by the total sales revenue. This essentially tells them how big the gap is between what a company sells and what it spends to make those sales.
The bigger the number, the more profitable the company is in theory.
MRR: Monthly Recurring Revenue
A company’s monthly recurring revenue gives investors a good idea about how much they earn every month, rather than in a snapshot format. Sometimes new companies have excellent months as a result of extensive marketing campaigns, and then sales drop off a cliff due to a lack of follow-up or other factors.
By looking at a startup’s MRR, investors can see if their success is consistent and likely to stay the same, or if it’s more of a fluke and they need to look elsewhere. If you want investors’ attention, try to get your MRR up as high as you can.
Revenue Growth
Revenue growth is also fairly self-explanatory, though some business students will recognize it as the “top line” for a company.
It’s a metric that shows the expansion potential or growth potential for a given business. In a nutshell, it illustrates increasing and decreasing sales over a set timeframe (usually a number of months or years). Investors usually try to find the revenue growth for a particular company using the timeframe when they reached their maximum productive potential given their available resources.
In other words, investors look at how much a company’s revenue has grown once all of its gears are turning and it is in full production. That gives the company a fair shake, as executives can’t say that they didn’t have all their product available or their infrastructure working at the time.
More importantly, looking at the revenue growth allows investors to identify trends that may affect a company or even an entire industry.
Net Income
This is most often referred to as the “bottom line” or “burn rate”. A company’s net income is simply its total earnings. You calculate it by adding all of the costs for running the company, including taxes, interest, depreciation on property or infrastructure, the cost to develop products or services, employee wages, and anything else, then deducting that from the total revenue amount.
What’s left should theoretically be positive (unless the company is heavily in debt). This tells investors how well the company is managing its expenses versus its profits. But a negative number isn’t necessarily a “no-go”.
Indeed, lots of startups remain heavily “in the red” (that is, they operate in debt) for the first few years of business.
Customer Acquisition
A company’s customer acquisition metric is, put simply, how much it costs to attract new customers to that business. It’s true that across industries it’s almost always cheaper to retain existing customers than it is to attract new customers, but you can’t really avoid acquiring new customers if you want to grow and expand.
This means companies must spend money to produce more of their product or service, upgrade that product or service, or expand what they offer in order to draw in new users or consumers.
Another good way to think of this metric is the CAC or “cost of acquiring a customer”.
How much money a company needs to spend, however, is heavily dependent on management, business plans, and other factors. If they see that it costs a company less to acquire new customers, they’ll be impressed. The reverse is true if it almost bankrupts a company to acquire new customers and reach its expansion goals.
Churn Rate
The churn rate for a company is a simple metric that boils down the total revenue potential for each customer. It refers to how quickly you “churn” through your customers – it indicates how quickly you burn through your customers and they stop giving you money.
Remember, it’s almost always cheaper to keep existing customers. But this being said, there are some businesses and industries where it’s almost impossible to get repeat customers, at least for the short term.
Specifically, investors will look to see if your churn rate exceeds your number of new customers or the reverse. Investors will be impressed if your new customer rate exceeds your churn rate – this indicates that you bring on more customers faster than you lose them.
As a side note, investors may also look at the ARPU or average monthly revenue per customer when determining whether a company’s churn rate actually exceeds its customer revenue or vice versa. Sometimes, companies with particularly high ARPU metrics can also have a high customer churn rate but still be worthwhile given how much money each individual customer brings in.
Revenue Per Employee
Another effective metric investors can use to see whether a given investment is a good idea is the revenue per employee. As the name suggests, this allows investors to see how efficient a business is when it comes to using their employees, and whether or not it’s inundated with too many employees or the reverse.
If a company has a high revenue per employee metric, that means that each employee produces a ton of value and that there may even be an argument to hire more employees in the future.
On the flip side, if a company has a low revenue per employee metric, that means either too many people are working or the employees currently working aren’t producing a ton of value by themselves.
We used materials from BAIN, Jonathan Hung, Plan.io.
A standard market-research may not always work, as relevant data for your business may not be available. Reaching out to existing entrepreneurs in the same industry/ segment of interest can help in better understanding of the market.
Once you have finalized your product / service, explore the market for competition.
There is no point in offering the same service or launching a product, which is already existing in the market, without any value addition. Once the competition mapping is completed and if a similar product or service exists in the market, ascertain how best you can better your product and service. You will be competing with an established market player with a set consumer base and if you must disrupt that model, then your product or service should be far superior.
It is also mandatory to determine whether your product / service complies with the law of the land. As witnessed in recent times, technology-backed businesses in India are facing legal hurdles simply because legislation to support them has not yet been drafted. Therefore, a business must work within the limited legal framework, which could be a potential hurdle for expansion if decisions are taken hastily. So, make sure that your product / service conforms to the regulatory standards set for the market.
Once you have finalized your product / service, explore the market for competition.
There is no point in offering the same service or launching a product, which is already existing in the market, without any value addition. Once the competition mapping is completed and if a similar product or service exists in the market, ascertain how best you can better your product and service. You will be competing with an established market player with a set consumer base and if you must disrupt that model, then your product or service should be far superior.
It is also mandatory to determine whether your product / service complies with the law of the land. As witnessed in recent times, technology-backed businesses in India are facing legal hurdles simply because legislation to support them has not yet been drafted. Therefore, a business must work within the limited legal framework, which could be a potential hurdle for expansion if decisions are taken hastily. So, make sure that your product / service conforms to the regulatory standards set for the market.
A standard market-research may not always work, as relevant data for your business may not be available. Reaching out to existing entrepreneurs in the same industry/ segment of interest can help in better understanding of the market.
Once you have finalized your product / service, explore the market for competition.
There is no point in offering the same service or launching a product, which is already existing in the market, without any value addition. Once the competition mapping is completed and if a similar product or service exists in the market, ascertain how best you can better your product and service. You will be competing with an established market player with a set consumer base and if you must disrupt that model, then your product or service should be far superior.
It is also mandatory to determine whether your product / service complies with the law of the land. As witnessed in recent times, technology-backed businesses in India are facing legal hurdles simply because legislation to support them has not yet been drafted. Therefore, a business must work within the limited legal framework, which could be a potential hurdle for expansion if decisions are taken hastily. So, make sure that your product / service conforms to the regulatory standards set for the market.
Once you have finalized your product / service, explore the market for competition.
There is no point in offering the same service or launching a product, which is already existing in the market, without any value addition. Once the competition mapping is completed and if a similar product or service exists in the market, ascertain how best you can better your product and service. You will be competing with an established market player with a set consumer base and if you must disrupt that model, then your product or service should be far superior.
It is also mandatory to determine whether your product / service complies with the law of the land. As witnessed in recent times, technology-backed businesses in India are facing legal hurdles simply because legislation to support them has not yet been drafted. Therefore, a business must work within the limited legal framework, which could be a potential hurdle for expansion if decisions are taken hastily. So, make sure that your product / service conforms to the regulatory standards set for the market.
still have questions?
