The 5 Metrics Every Startup Should Track

Dec 17, 2023 — Alexandra Ardelean

And how to use them effectively

Metrics are vital for startups. They enable better decision-making and provide the sole means of gauging your startup's performance. Operating a startup without metrics is like flying blind.

I've seen many founders launch without basic metrics and then go back to build them in. This is a mistake. It's much easier to build in metrics from the start than to add them later.

Investors can tell if you're in command of your metrics. If you can't discuss your key metrics fluently, it's a red flag.

But there are also ways to misuse metrics. Here are some common mistakes I see founders make:

Warning 1: Too Many Metrics Can Be Counterproductive

It's easy to get carried away with metrics. But having too many can be counterproductive. You don't want to be like the founder who split tests button colors for weeks without making any real progress.

Warning 2: Don't Change Metric Definitions to Make Numbers Look Better

It's tempting to change metric definitions when the numbers don't look good. But this is a bad idea. It's better to have consistent definitions over time, even if the numbers aren't great.

Warning 3: Don't Let Metrics Replace Customer Interaction

Metrics are important, but they're not a substitute for talking to customers. You need to understand the "why" behind the numbers.

In this article, I'll explain how to use metrics effectively as a founder. I'll cover:

How to prepare for a product launch with metrics in place
What to do if your metrics disappoint you after launch
How to identify key metrics for your startup
The most important financial metrics for investor updates
A deep dive into two key metrics: retention and gross margin

Let's get started.

Preparing for a Product Launch with Metrics in Place

Before you launch your product, you should have a plan for what metrics you'll track and how you'll track them. Here's how I recommend doing that:

Step 1: Choose Your Key Metrics Before Launching

Before you launch, decide on 4 or 5 key metrics that will be most important for your business. These should be the numbers that will tell you if your startup is doing well or poorly.

As an illustration, if you're in the process of establishing a B2B SaaS enterprise, some of the critical metrics you might want to focus on include:

Revenue
Retention
Gross margin
Sales efficiency (CAC payback period)

Step 2: Use a Simple Analytics Solution

You don't need anything fancy to track your key metrics. A simple analytics solution like a SQL database or PostHog will work just fine.

The most important thing is that it's easy for everyone on your team to use and understand.

Step 3: Agree on Metric Definitions

Before you start tracking your key metrics, make sure everyone on your team agrees on what they mean.

For example, what counts as "revenue"? What counts as a "retained user"? Having clear definitions will prevent disagreements down the line.

Handling Metric Disappointments Post-Launch

After you launch, there will inevitably be times when your metrics disappoint you. Here's what not to do:

The Temptation: Change Your Metric Definitions When the Numbers Don't Look Good

It's tempting to change your metric definitions when the numbers don't look good. For example, if your retention rate is lower than you'd like, it might be tempting to start counting users differently so that the number looks better.

But this is a bad idea. It's better to have consistent definitions over time, even if the numbers aren't great.

The Reality: Internal Consistency Holds More Value Than Inter-Company Comparisons

When investors look at your metrics, they're not comparing them against some absolute standard. They're comparing them against themselves over time.

So it's more important that your metric definitions are consistent internally than that they match up with other companies' definitions perfectly.

Identifying Key Metrics for Startups

There are many different ways to measure success as a startup. But not all of these measurements are equally useful.

Historically, startups have relied on vanity metrics - numbers that look impressive but don't necessarily reflect genuine business success - as their main indicators of progress.

For example, in the early days of e-commerce, Gross Merchandise Volume (GMV) was often used as a vanity metric by e-commerce companies because it looked good and was easy to measure.

But GMV doesn't tell you anything about whether or not a company is actually making money - which is why it's considered a vanity metric today.

Today, there are still many common vanity metrics that startups use - like Monthly Active Users (MAUs) and Daily Active Users (DAUs) - but these numbers can be misleading because they don't tell you anything about whether or not users are actually getting value from the product.

Instead of relying on vanity metrics, I advise startups to focus on measuring factors that directly correlate with company success, such as revenue and retention, as their primary indicators of achievement.

Here are some examples of core measurements of success for different types of startups:

For most B2B companies: Revenue is probably the best core measurement of success because it directly correlates with company success.
For most B2C companies: Retention is probably the best core measurement of success because it directly correlates with customer satisfaction and loyalty.
For marketplaces: Gross Merchandise Volume (GMV) can be a useful measurement of success because it directly correlates with transaction volume.
For social networks: Daily Active Users (DAU) can be a valuable metric of success as it directly correlates with user engagement.

Key Financial Metrics for Investor Updates

When sending out investor update emails, there are many different financial metrics that founders can include in their updates - but not all of these financial metrics are equally important.

In my opinion, revenue should always be at the top of every investor update email because it's the most important financial metric for most startups - especially early-stage startups - since revenue is what ultimately determines whether or not a startup will be successful in the long run.

In addition to revenue, there are two other financial health indicators that I think founders should always include in their investor update emails:

Burn rate refers to the amount of money a startup spends monthly and is a critical indicator of financial health. It gives investors insight into how quickly a startup is depleting its cash reserves, influencing their investment decisions and confidence in the company's stability.
Runway: Runway is how long a startup has until it runs out of money and is an important indicator of financial health because it tells investors how much time a startup has left before it needs to raise more money or become profitable.

Deep Dive into Retention as a Key Metric

Retention is a key metric for startups, showing how many customers stick with your product. This is vital for gauging customer satisfaction and loyalty.

Retention can be measured in many different ways depending on what type of product or service you're building - but here are some common ways that startups measure retention:

Daily Active Users (DAUs): The number of unique users who use your product on any given day.
Weekly Active Users (WAUs): The number of unique users who use your product at least once per week.
Monthly Active Users (MAUs): The number of unique users who use your product at least once per month.
Churn rate: The percentage of customers who stop using your product over time.
Net Promoter Score (NPS): A customer satisfaction score based on how likely customers are to recommend your product to others.
Repeat purchase rate: The percentage of customers who make more than one purchase over time.
Customer lifetime value (CLV): The total amount of money that customers spend on your product over time.

Of these different ways to measure retention, churn rate is probably the most common way that startups measure retention because it's easy to calculate and gives you a clear sense of how many customers are leaving over time.

However, churn rate doesn't tell you anything about why customers are leaving - which is why I think NPS can also be an important way for startups to measure retention because it gives you insight into customer satisfaction and loyalty beyond just whether or not they're using your product.

Net Dollar Retention in B2B SaaS Companies

Net dollar retention is a key metric for startups, particularly B2B SaaS companies, to gauge their performance in retaining customers and generating additional revenue from those customers over time, rather than solely relying on acquiring new customers.

Calculating Net Dollar Retention

Net Dollar Retention measures the additional revenue generated by existing customers over time, beyond simply acquiring new customers. This is calculated by analyzing changes in Monthly Recurring Revenue (MRR) from existing customers, taking into account expansion revenue from upsells and cross-sells, contraction revenue from downgrades, and churned revenue from lost customers.

To calculate net dollar retention, take the MRR from existing customers at the beginning of a period (e.g., Q1) and compare it against MRR from those same customers at the end of that period (e.g., Q2).

If MRR from existing customers at the end of Q2 has increased due to expansion revenue from upsells/cross-sells more than MRR lost due to contraction revenue from downgrades/churned revenue from lost customers compared against MRR from those same customers at the beginning of Q1, then net dollar retention will be greater than 100%.

If MRR from existing customers at the end of Q2 has decreased due to contraction revenue from downgrades/churned revenue from lost customers more than MRR gained due to expansion revenue from upsells/cross-sells compared against MRR from those same customers at the beginning of Q1, then net dollar retention will be less than 100%.

Interpreting Net Dollar Retention Above or Below 100%

Net dollar retention above 100% means that existing customers are generating more additional revenue over time beyond just new customer acquisition due to expansion revenue from upsells/cross-sells compared against contraction/churned revenue lost due downgrades/lost customers - which indicates strong customer satisfaction/loyalty and healthy growth potential for B2B SaaS companies since they're able generate more additional revenue from existing customers without having rely solely on new customer acquisition for growth.

Net dollar retention below 100% means that existing customers are generating less additional revenue over time beyond just new customer acquisition due contraction/churned revenue lost due downgrades/lost customers compared against expansion revenue from upsells/cross-sells - which indicates weak customer satisfaction/loyalty and unhealthy growth potential for B2B SaaS companies since they're unable generate enough additional revenue from existing customers without having rely solely on new customer acquisition for growth.

Deep Dive into Gross Margin as a Key Financial Metric

Gross margin is one of the most important financial metrics for startups because it tells you how much profit you're making after accounting for cost of goods sold (COGS) - which is crucial for understanding profitability and scalability potential as a business.

Understanding Gross Margin and Its Importance

Gross margin measures how much profit you're making after accounting for cost of goods sold (COGS) by subtracting COGS from total sales/revenue generated by selling products/services during specific period time period (e.g., quarter/year).

Definition and Calculation of Gross Margin

Gross margin = Total sales/revenue generated by selling products/services during specific period time period - Cost Of Goods Sold (COGS)

Gross margin % = Gross margin / Total sales/revenue generated by selling products/services during specific period time period x 100%

Gross margin % tells you what percentage total sales/revenue generated by selling products/services during specific period time period represents profit after accounting COGS by dividing gross margin by total sales/revenue generated by selling products/services during specific period time period multiplying result by 100%.

Historically speaking, gross margin has been one of the most important financial metrics used by investors and analysts to evaluate the profitability and scalability potential of businesses. Higher gross margins indicate stronger performance, while lower gross margins reflect weaker potential, regardless of total sales or revenue generated during a specific period. This is because higher gross margins signify higher profits after accounting for the cost of goods sold (COGS), whereas lower gross margins result in lower profits, also independent of total sales or revenue.

Historical Context: Negative Gross Margin Businesses in Low Interest Rate Environment

In low interest rate environments where cost capital was cheap/easy access due low interest rates set central banks/federal reserve banks around world order stimulate economic growth following global financial crisis great recession 2008/2009 , negative gross margin businesses became popular among venture capitalists/startup founders seeking rapid growth scale quickly without worrying about profitability since cost capital was cheap/easy access due low interest rates set central banks/federal reserve banks around world order stimulate economic growth following global financial crisis great recession 2008/2009 .

Negative gross margin businesses were able achieve rapid growth scale quickly without worrying about profitability since cost capital was cheap/easy access due low interest rates set central banks/federal reserve banks around world order stimulate economic growth following global financial crisis great recession 2008/2009 by raising large amounts venture capital funding private/public markets order subsidize losses incurred selling products/services below cost order acquire new users/customers quickly achieve market dominance scale rapidly before competitors could catch up .

However , negative gross margin businesses were unable achieve sustainable profitability long run since they were losing money every sale made after accounting COGS , which meant they had rely heavily venture capital funding private/public markets order stay business keep growing scale quickly without worrying about profitability .

As result , many negative gross margin businesses failed go bankrupt once cost capital increased became expensive/harder access due higher interest rates set central banks/federal reserve banks around world order slow down economic growth prevent inflationary pressures rising too quickly .

In high interest rate environments where cost capital was expensive/harder access due higher interest rates set central banks/federal reserve banks around world order slow down economic growth prevent inflationary pressures rising too quickly , negative gross margin businesses became less viable since they were losing money every sale made after accounting COGS , which meant they had rely heavily venture capital funding private/public markets order stay business keep growing scale quickly without worrying about profitability .

Case Study: Monzo's Journey from Negative Unit Economics to Profitability

Monzo, a UK-based online bank, presents an interesting case study in negative unit economics, demonstrating how a company can turn profitable in the long run despite initial challenges in achieving early sustainability.

When Monzo first launched its prepaid debit card app UK market , it offered free international ATM withdrawals exchange rates competitive traditional high street banks order acquire new users/customers quickly achieve rapid growth scale fast become dominant player UK challenger bank space .

However , free international ATM withdrawals exchange rates competitive traditional high street banks meant Monzo was losing money every transaction made abroad prepaid debit card app since costs associated providing free international ATM withdrawals exchange rates competitive traditional high street banks exceeded revenues generated transactions made abroad prepaid debit card app .

As result , Monzo had rely heavily venture capital funding private/public markets order subsidize losses incurred providing free international ATM withdrawals exchange rates competitive traditional high street banks while acquiring new users/customers quickly achieve rapid growth scale fast become dominant player UK challenger bank space .

However , Monzo eventually realized providing free international ATM withdrawals exchange rates competitive traditional high street banks wasn't sustainable long run since costs associated providing free international ATM withdrawals exchange rates competitive traditional high street banks exceeded revenues generated transactions made abroad prepaid debit card app .

As a result, Monzo decided to remove free international ATM withdrawals and offer exchange rates that compete with traditional high-street banks. They introduced a prepaid debit card app with a fair and transparent pricing model, charging a small fee for every transaction made abroad, instead of relying heavily on venture capital funding to subsidize losses. This strategy aimed to achieve rapid growth, acquire new users quickly, and scale fast to become a dominant player in the UK challenger bank space.

By removing free international ATM withdrawals exchange rates competitive traditional high street banks prepaid debit card app introducing fair transparent pricing model charging small fee every transaction made abroad prepaid debit card app , Monzo was able achieve positive unit economics every transaction made abroad prepaid debit card app since costs associated providing fair transparent pricing model charging small fee every transaction made abroad prepaid debit card app were lower than revenues generated transactions made abroad prepaid debit card app .

As result , Monzo was able achieve sustainable profitability long run positive unit economics every transaction made abroad prepaid debit card app since costs associated providing fair transparent pricing model charging small fee every transaction made abroad prepaid debit card app were lower than revenues generated transactions made abroad prepaid debit card app .

By achieving positive unit economics every transaction made abroad prepaid debit card app , Monzo was able reduce reliance heavily venture capital funding private/public markets order subsidize losses incurred providing free international ATM withdrawals exchange rates competitive traditional high street banks while acquiring new users/customers quickly achieve rapid growth scale fast become dominant player UK challenger bank space .

As result , Monzo became profitable long run achieved sustainable profitability positive unit economics every transaction made abroad prepaid debit card app since costs associated providing fair transparent pricing model charging small fee every transaction made abroad prepaid debit card app were lower than revenues generated transactions made abroad prepaid debit card app .

By achieving sustainable profitability positive unit economics every transaction made abroad prepaid debit card app , Monzo was able reduce reliance heavily venture capital funding private/public markets order stay business keep growing scale fast become dominant player UK challenger bank space without worrying about profitability long run .