Stickiness matter

Today, I had a meeting with someone who spoke a lot – and I liked listening. She had clever things to say about metrics that matter for startups in order to make investors feel safe and want to fund you. Mainly: your metrics (seed-stage startup) that matter are Revenue, Churn and Margins.

And maybe equally important: if you don’t regularly measure and use it, it’s not useful.

Churn

Stickiness matter

Stickiness is super important, so measure different churns throughly. And keep them ready at hand with investors. Apparently, a common mistake is being caught off guard when investors ask about yearly churn, and you only know monthly (or visa versa).

1. Logo churn, number of paying customers who churn.
2. Net MRR churn or “dollar churn” (This includes upsell)
3. Gross MRR churn (don’t include upsells)

Example (seats cost 10$/month):

• 15th of May, customer A signs up for 1 seat.
• 29th of May, customer B signs up for 2 seat.

So for may, we have a MRR of 20$ and 2 paying customers, each having 2 seats.

• 3rd of June, customer C signs up for 1 seat.
• 5th of June, customer B cancels.
• 10th of June, customer A upgrades to 6 seats.

What’s our logo churn? 50%. 1 out of 2 customers we had in May are gone. Customer C doesn’t count at all in churn, because they weren’t a customer in the previous period.

What’s our net MRR churn? Negative 100%! We had 20$/month incom from A and B, now we have 40$/month (all from A).

What’s our gross MRR churn? 66%. Our 3 original seats are now 1.

These metrics are progressively more hard to calculate, and each are typically expected a bit later than the other for startups.

Margins

Again, there’s 3 levels of margins.

Note: margin levels seem not to be a industry standard, so take these with some grains of salt, and consider adapting them to what’s useful in your case.

CM1: Sales - cost of sales CM1 or Unit Contribution Margin tell something about what margins could be when the company gets big enough that fixed costs become miniscule. Sort of a “potential for future margin”.

This includes the variable cost that change based on use/sales/production, like salary of sales efforts and support, what you pay your SMS and auth provider for pay-per-use usage and such.

CM2: CM1 minus fixed costs. The idea here is to say how margins are at the moment, if we were to just to keep the lights on.

This includes CM1, but also your rent, your salaries of “maintenance” employees, insurance and any expenses that are fixed regardless of additional sales.

CM3: Everything? From the definitions I’ve seen mostly: CM3 = CM2 + marketing costs. I’m honestly not seeing quite the usefulness on that one myself, and would just ignore CM3 and look at overall margins including all expenses instead.

Revenue

MRR is good

As a SaaS only selling subscriptions, I often forget Monthly Recurring Revenue (MRR) is not just revenue. But it’s the revenue that you can expect to repeat every month. And it’s obviously an important number.

Your CAC is never 0.

Let’s say you have 0 marketing budget. You do not hire a marketing agency to generate som content. You do not spend time or money on a campaign setup. You yourself only spend 10% of your time on sales-releated activities, and you do not take any pay as a founder.

If you gain 2 customers during a month, what’s the CAC?

It’s not 0!

• Expected salary for you: 10k/month
• Time spent: 10% = 1k
• Customers gained: 2
• = 500$ CAC

CLTV can guide your marketing spend

Customer Lifetime Value (CLTV) tells you how much a customer is expected to be worth.

For instance:

• You have a CM1 of 40%
• Revenue per customer of ~100$/month
• Expected churn after 24 months.
• = CLTV of 0,4 * 100 * 24 = 960$ CLTV

You could get bonus points if you discount the future value against todays value

CLTV:CAC ratio can guide you on whether to hold back or push marketing efforts, as marketing typically yields higher CAC the “harder you push”

• 1:1 – You’re loosing money, as there are hidden costs. Don’t push it.
• 1:2 – Costly, I guess you’re prioritizing growth (and that’s fine)
• 1:3 – Good.
• 1:4 - Very good, maybe consider increasing the marketing spend?

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Showcase your good metrics, obsess over your bad metrics

In pitches, slide decks and investor meetings: showcase your good metrics. Internally in your organization, obsess over how to fix the bad metrics.