“What gets measured gets done,” is a popular quote attributed to management guru Peter Drucker that rings true for most facets of life.
Both the word “measurement” and “metric” share the same Proto-Indo-European (PIE) root (me-, meaning “to measure”). “Metric” takes an origin story journey through the Greek word metron (meaning “meter, a verse; that by which anything is measured; measure, length, size, limit, proportion”), its plural form he metrike, before ending up as the Latin word “metric” by 1760. “Measurement” took its linguistic route through Latin (metiri), to Old French (mesurer) before ending up in the English language with the addition of the Latin suffix –ment around the 18th century.
Etymology aside, why are metrics important? Well, the noun “metric” is defined as any standard of measurement. The most reliable way to prove a business is worth an investment to those willing to invest is through metrics—key numbers and figures that chart a business’s past and current status, giving a glimpse of its future potential. For founders and investors both, the goal is to make returns on an investment, and a company that does not track relevant metrics may be sending all the wrong signals.
Also, the fact that you can set a target and keep track of the progress you have made shows accountability, and investors love accountability.
Hold your horses
You do not just go on measuring everything. Knowing that you need to measure is good, but knowing what to measure and how is the key to real success. For example, if you are a payments company, measuring the number of downloads your app receives is not as important as the amount and value of transactions you process. So, the metric you measure is fundamentally determined by what business model you operate.
Founders should know these six fundamental metrics investors look for when examining a prospect.
1. Gross Margin
This indicates how expensive it is to make your product or offer your service. Expressed as a percentage, this is calculated either by taking the business’ total sales revenue and subtracting the cost of goods sold (then dividing by the total sales revenue) or the selling price of an item, less the cost of goods sold.
2. Revenue Growth
Also known as the “top line”, this metric indicates the growth or expansion potential of a business through the illustration of increasing and decreasing sales over a period. Rather than simply being a snapshot of revenue, it can convey trends.
3. Net Income
Also known as the “bottom line”, “profit attributable to shareholders”, or “burn rate”. This shows the business’ total earnings and is calculated by taking all costs incurred (including cost of doing business, depreciation, interest, taxes, and other expenses) away from the revenue amount.
4. Contribution Margin
This metric shows the profitability of individual products. The Contribution Margin is used to determine whether variable costs for your product can be reduced, or if the price of the product should be increased.
Depending on the sector your business operates in, this margin can range from 5% to 25%.
5. Churn Rate
A metric which shows the revenue potential of each of your individual customers. The larger churn your business experiences, the more difficult you will find Revenue Growth.To expand your customer base, your number of new customers need to exceed your churn rate.
6. Customer Acquisition Cost
The cost associated with attracting customers to your business. As you work to engage potential customers, you spend money on producing the product or service you offer, research, and marketing – the less you can spend on customer acquisition, the better.