Everyone who is starting a new business understands the basic concept of profit. If you earn more than what you spend the difference is your profit and the bigger the difference the more money you earn. The most important question is: how do you run a profitable business?
First and foremost, a profitable business sells a product that people need, use, and pay for. If you’re starting a new business, that’s probably all you think about, turning your vision into reality into build a starter product that solves customer problems and is worthy of their financial commitment.
Second, an entrepreneur who runs a profitable business understands key financial and analytical metrics and how they can influence profits. These metrics are your key performance indicators (KPIs).
In this article, you’ll find nine essential metrics you need to know and measure. Your KPIs can change as your startup grows. For example, when you launch your startup, new registrations or activations can be an important KPI to assess the validation of your startup idea and the viability of the solution in meeting the needs of your customers. As your startup grows, your focus may extend to key performance indicators such as customer acquisition cost, lifetime value, and churn rate.
To see how these metrics can affect your startup’s profitability and valuation, run simple business calculations to measure how your profits will increase or decrease with a change in each of the metrics below.
1. Customer lifetime value
The LTV or Lifetime Value of a Client is the income that a client can generate for your startup during the lifetime of their membership. In a subscription product, you can calculate the LTV by first determining the customer value by multiplying the average purchase value by the purchase frequency. Multiply the average customer value by the average period (in months or years) that the customer is retained.
If you know how much money you can make from a client, you will have a much clearer idea of how much you should invest in acquiring a new client.
2. Cost of customer acquisition
Customer acquisition cost or CAC is the money you spend to acquire a customer. When you launch your startup with a new product and an unfamiliar brand your CAC may be high, but when you understand your ideal customer, find your top performing marketing channel, and get referrals through your first few users, your CAC may start to decline. . CAC includes your sales, marketing and distribution expenses.
3. Unsubscribe rate
The unsubscribe rate shows the percentage of your paying customers who canceled their purchase. This is a metric that you should aim to keep as low as possible.
4. Customer retention
Customer retention is the opposite of churn rate. It shows the percentage of your retained paying customers who have renewed their subscription to your product. High retention means you are delivering the promised value to your customers and they are happy with your product.
5. Cash flow
Cash flow measures your costs against income because it captures the money coming in and going out of your business. A positive or free cash flow indicates liquidity with more money going into the business than out.
6. Return on investment
Return on investment or return on investment is a measure used to calculate the gains or losses derived from an investment. To calculate your return on investment in a new business, project, or initiative, divide your profit or loss by your total investment and multiply the result by 100 to get the percentage return on investment.
7. Burn rate
The burn rate refers to the amount of capital that a start-up spends or “burns” to finance its operation. The burn rate of a startup can depend on the business model, funding, and growth strategy.
Revenue is the money you generate from sales and is a measure of startup performance. However, in many cases, income is not an accurate measure of the financial health of your business because it does not include business expenses.
9. Net income
Your net income is the difference between your income and your expenses. Paying close attention to your customer’s lifetime value, customer acquisition cost, churn rate, retention, cash flow, ROI and burn rate will help you increase the difference. between your income and expenses, so you can run a profitable startup business while understanding key metrics. that play an important role in improving the financial performance of your business.
If you are starting a new business and feel that it is still early days to start thinking and planning the above steps, remember that you can create a product that your customers love and always fail. A startup cannot support value creation if its most basic and key metrics don’t add up. At every stage of your business, as much as you think about your product’s value proposition, think about the financial health of your startup.