The managers of start-up organizations often become so overwhelmed with securing funding and hiring talent that they forget about sales metrics. Unfortunately, this can have disastrous consequences. That is because it is impossible for the company to plan for future growth when it is uncertain of where it currently stands.
Taking the time to create revenue, customer, and sales metrics makes forecasting much easier. Below are some examples of each of these metrics.
The revenue run rate (RRR) tells a business how its sales are developing during a specified time. It highlights problems with pricing strategy in addition to picking up seasonal and directional trends. Perhaps most importantly, this number helps entrepreneurs determine if they are likely to hit future sales forecasts.
The average revenue per user (ARPU) displays the typical contribution to revenue for each customer. When the number rises, it means that the company is increasing its pricing power in addition to achieving more sales from customers. One caveat here is that the ARPU doesn’t inform the entrepreneur about the quality of each customer’s sales. This requires breaking down sales by customer type and channel to determine legitimate trends.
Churn rate refers to the percentage of customers who drop a company’s products or services in a time frame that it determines. Keeping churn rates low is especially important for start-up organizations because acquiring a new customer is costlier than keeping an existing one. Start-up managers would be wise to conduct interviews with customers who leave to identify patterns of dissatisfaction. Speaking to past customers in person and asking directly what the company can do better has proven more effective than sending email surveys.
Cost per acquisition (CPA) is another critical finance metric for start-ups. While some expenditure is necessary, spending too much money to attract new customers can cause the business to go under in a hurry. The best way to determine CPA is to divide the total cost of marketing and sales in a time period by the number of new clients it acquired during the same measuring period. CPA is too high when the cost of obtaining a new customer is greater than the profits he or she makes for the start-up business.
Annual contractual value (ACV) is a sum that represents new and add-on opportunities the company acquired during the year. Without knowing its ACV, start-up organizations cannot develop a sufficient pipeline.
Of the numerous important sales metrics, pipeline may be the most essential of all. Not understanding what the pipeline consists of makes it difficult for organizations to meet revenue goals, let alone exceed them.
Gross margins allow an organization to determine its operating profitability. Since most start-ups are not immediately profitable, this metric is not as meaningful in the beginning. However, every company should know the average gross margin for its industry. Keeping gross margins as a goal is essential because it highlights the effectiveness of customer service, management, and sales.
Many new businesses fail in the first two years due to lack of planning. Incorporating metrics from each of these categories allow start-up managers to defy the odds.