How to do Startup Metrics – Formulas and Calculation Help You Make Wise Decisions about Your Start-Up

Context

As an entrepreneur and angel investor, we’ve learned that there are certain financial terms and metrics that investors and entrepreneurs are expected to know.

Here are the following most commonly used startup metrics. It’s important to note that most of these terms are not official accounting terms. As such, there isn’t an official standard of how to calculate them. I’ve compiled this based on my experience working with the entrepreneurs and angel investors along with source reference information.

1) MRR

MRR (Monthly Recurring Revenue) is income that a company can reliably anticipate every 30 days. Revenue from one-time purchases billed at the time of purchase is not included in MRR. This metric is only applicable to companies that provide services to their customers through an ongoing contractual relationship. This includes SaaS (Software as a Service) companies and any other subscription-based services, including gym memberships and box-of-the-month clubs. This also includes service providers offering multi-month retainers such as marketing, law and accounting firms.

There are two main ways that MRR can be calculated.

  1. MRR should be calculated on a customer-by-customer basis. For example, if Customer X is paying ₹ 65 per month and Customer Y is paying ₹ 100 per month, and both customers have subscribed to an annual plan, then Monthly Recurring Revenue would be equal to ₹ 165 per month. This approach is the most accurate way to calculate MRR and is the best formula for companies with very few customers.
  2. MRR can also be calculated by using the consistent monthly revenue generated by each customer or by multiplying the total number of paying customers by the average of the amounts paid by each customer each month (known as the Average Revenue per User or ARPU). For example, If Company X has 30 customers paying an average of INR 100 per month, its Monthly Recurring Revenue would be equal to INR 3,000 per month. If a company is billing on a quarterly or annual basis, the average price per month should be used in the equation. Monthly Recurring Revenue can be zero or a positive number but cannot be negative. MRR always refers to recurring revenue on a monthly basis. Quarterly or annual MRR typically refers to the average MRR for the specified time period.

Monthly Recurring Revenue can be calculated by using the consistent monthly revenue generated by each customer or by multiplying the total number of paying customers by the average amount all of those customers are paying each month (known as Average Revenue per User, or ARPU). Refer to the reference article, MRR – The Definition and Formula for Monthly Recurring Revenue, for a more detailed explanation.

2) Repurchase Rate

Repurchase Rate measures customer loyalty and is most commonly used in businesses that do not have a subscription-based business model, such as e-commerce and consumer products companies. Repurchase Rate typically is calculated by dividing the number of customers who made at least two purchases within a period by the total number of customers within that same period. However, it is sometimes calculated with a slightly more complicated formula that considers the number of times each customer makes a repeat purchase. For this Repurchase Rate formula and for more details, refer to the reference article: Repurchase Rate: The MRR of Non-SaaS Startups, for a more detailed explanation.

3) Churn Rate

Churn Rate is a metric for measuring retention, most frequently referring to customer retention. As a customer retention metric it is like MRR in that it is only applicable to companies that provide services to their customers through an ongoing contractual relationship. There are two different types of customer-related churn: Customer Churn and Revenue Churn. For further detailed explanation, refer to the reference article: Churn: The Churn Rate Formula and Definition.

4) Cost of Goods Sold

Cost of Goods Sold (COGS) includes any direct costs associated with the production of the products sold by a company. For companies selling physical products, COGS includes the cost of raw materials, including freight or shipping charges, the cost of storing raw materials and the finished products the business sells, direct labor costs for workers who produce the products, factory overhead expenses, and depreciation.

Cost of Goods Sold for companies that do not sell a physical product (e.g., a SaaS business) include costs that are incurred in the delivery of the product, such as costs to run the platform (e.g., hosting costs), support personnel and customer on-boarding costs. For further detailed explanation, refer to SaaS Cost of Goods Sold.

Determining what to include in Cost of Goods Sold can be fairly complicated, so strongly suggested consulting a financial professional before calculating this metric.

5) Gross Profit

Gross Profit is a company’s total revenue minus the Cost of Goods Sold (COGS).

6) Gross Margin

Gross Margin is the difference between revenue and Cost of Goods Sold (COGS), divided by revenue, and expressed as a percentage. It is essentially the same metric as Gross Profit, but it expresses the variance between revenue and Costs of Goods Sold rather than the amount of profit earned.

7) Burn Rate

The Burn Rate is the speed at which a company’s cash balance is declining on a monthly basis. It is reported as a dollar amount that typically is a positive number. If the company is earning more than it is spending, the company’s Burn Rate will be a negative number. However, Burn Rate typically is used only when a company’s cash is declining each month (e.g., in venture-capital-backed businesses). This metric can be calculated as Net Burn Rate or Gross Burn Rate. From my experience, investors and entrepreneurs are typically referring to Net Burn Rate when they use the Burn Rate metric. For the Net and Gross Burn Rate formulas and further explanation, refer to the article Burn Rate by venture capitalist.

8) Customer Acquisition Cost (CAC)

Customer Acquisition Cost (CAC) can be calculated by dividing the sales and marketing costs within a period by the number of customers obtained during that same period. Common sales and marketing costs include paid advertising, website design/hosting/maintenance costs, salaries for sales and marketing staff (or a portion of salaries for multi-purpose employees), fees paid to sales- and marketing-related contractors, travel expenses for sales- and marketing-related trips, event promotional items and other event-related costs, marketing collateral, CRM and marketing automation software licenses, sponsorships, and gifts to customers. Costs incurred for retaining and upselling existing customers, rather than acquiring new customers, should not be included. So recommended consulting a financial professional to determine what to include when computing sales and marketing costs.

9) Lifetime Value (LTV)

Lifetime Value (LTV) is also commonly referred to as Customer Lifetime Value (CLV or CLTV) or Lifetime Customer Value (LCV). This metric is calculated by multiplying the average value of a sale by the average number of repeat transactions over the average retention period of a customer. As illustrated in the article, “How to Calculate the Lifetime Value of a Customer,” an easy example would be the Lifetime Value of a gym member who spends ₹ 1200 every month for 3 years. The value of that customer would be ₹ 1200 X 12 months X 3 years = A Lifetime Value (LTV) of ₹43200.

For businesses with recurring revenue, a more accurate picture of Lifetime Value can be calculated by including the Gross Margin and Churn Rate in the equation. This article offers detailed instructions on how to do that.

10) Capital Raised to Date

Capital Raised to Date refers to the amount of money a company raises to finance its operations. Revenue from company operations should not be included in this metric. For further detailed explanation, refer to the guideline article: Capital Raised to Date? How Investors Should Ask and Entrepreneurs Should Answer This Question.

Key Insight

Isn’t it amazing how all of these metrics are connected? But it can be difficult to measure and monitor all of these metrics as a small startup. You just don’t have the time.

I recommend you start small and focus only on the ones that affect your bottom line, for example revenue, CAC, LTV and churn. As I mentioned that these terms are not official accounting terms, nor is there an official standard of how to calculate them. If you think any of these metrics should be calculated differently, please comment.

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