“What gets measured gets done”
a popular quote from peter Drucker that rings true in most facets of life. The word metric comes from the original Greek word metron from which we derive meter. The metron was the term used to denote distance and to understand how far a work had gone or needed to go.
Today a metric is any standard unit used to determine how much progress one has made. This is especially important for founders seeking to raise some investment for their startups, because investors require to understand how far you have gone. So, how far have you gone?
The primary goal of an investor is return on investment (ROI) and it is only common sense to know that businesses that do not make progress cannot multiply money. So how do you prove you are making progress? through metrics.
Also, the very fact that you could lay down a benchmark and meticulously keep track of the progress you have made shows accountability, and investors love accountability.
Hold your horses
Yes, 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.
We recently hosted an Ignite session where we discussed various business models and the metrics investor consider before investing in more detail, you can watch the session here.
Here are 6 metrics investors look for when examining your business.
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.