The Key Business Metrics That Really Matter

When startup and expan sion stage com pa nies are court ing ven ture cap i tal ists and seek ing invest ments, it’s easy for them to get caught up in mind-numbing met rics that show the sound ness of their eco nomic model and the business’s sharp growth trajectory.

And in that sce nario, busi ness met rics are extremely impor tant.

Ven ture cap i tal firms want to see tons of data, mod els, and infor ma tion that speak to a company’s long-term health. Met rics can cer tainly do that. They can also help com pa nies scale their teams, act on low per form ers, drive toward rev enue goals, and pre dict and influ ence outcomes.

But when you’re focus ing on day-to-day oper a tions, the best prac tice is to keep it simple.

Yes, I know there are a lot of impor tant met rics and that each one has a spe cific pur pose. But I’m a sim ple man look ing for sim ple answers. With that in mind, I’ve boiled the myr iad met rics out there down to the three that tell a great story and indi cate that some­thing great is happening.

So, when you don’t have investors ask ing for pages of data and you’d like to keep your san ity, I sug­gest using these three:

1. New busi ness vs. sales and mar ket ing expense

If your new busi ness exceeds your sales and mar ket ing expenses, then you know that you’re build ing a sound model. That sort of pro por tion gen er ally means that you have a sound sales process and you’re get ting closer to the oppor tu nity to build a scal able model.

Mar ket ing Profs pres i dent Roy Young exam ines the prin ci ple of this met ric in far greater detail on his blog. But here’s the sim ple truth: you must make more money from a cus tomer than you spend to acquire them. Oth er wise, it’s going to be tough to succeed.

2. Renewal rates greater than 85%

This met ric is par tic u larly impor tant to soft ware com pa nies that exe cute a SaaS model. If that’s you, this met ric will help gauge cus­tomer ser vice and the health of your company’s annual rev enue. If your renewal rates are greater than 85 per cent and your cus­tomers like you, then you’re prob a bly in good shape.

As John War rilow argues at Built to Sell, busi nesses with a sub scrip tion model must live and die by their renewal rate. If it’s between 80 and 90 per cent, then they can spend less time scram bling to replace cus tomers and more time focus ing on new cus tomer acqui­si tion. For SaaS com pa nies, a renewal rate of greater than 85 per cent means they’ll at the very worst tread water and very likely expe ri ence rapid growth.

3. High gross margin

This is the ulti mate metric. In my expe ri ence, com pa nies that reach a gross mar gin of 70 per cent are really begin ning to emerge and put their foot on the throt tle. Nev er the less, the higher your gross mar gin, the health ier the com pany is bound to be.

Investors tend to pay a lot of atten tion to gross mar gin as one of a company’s vital signs. As Harry Domash explains at MSN Money, ris ing gross mar gins indi cate that a com pany is either reduc ing costs or rais ing prices to meet mar ket demand. Either way, high gross mar gin gen er ally trans lates to a higher profit mar gin and allows a com pany to invest in grow ing the business.

Ted Hurl but at Inc.com goes into greater detail about gross mar gin, list ing sev eral rea sons why it’s crit i cal that small busi nesses focus on it. Man ag ing and mon i tor ing gross mar gin on a reg u lar basis will cut down on monthly and quar terly bud get sur prises, and allow com pa nies to bet ter pre dict prof itabil ity, cash flow, and productivity.

Keep it sim ple (and accurate)

As with any busi ness met ric, it’s obvi ously impor tant to make sure the infor ma tion you gather on all of the met rics above is timely and accurate.

Barry Trailer at CSO Insights explains why on his blog, using data from a sales opti miza tion sur vey he exe cuted last year. In every sin gle area of his sur vey, man agers who relied on accu rate met rics vastly exceeded expec ta tions and were able to pro pel the com­pany forward.

So, which busi ness met rics are you using?

I real ize that the three met rics I men tioned above aren’t the only impor tant ones. But when it comes to mon i tor ing a business’s over­all per for mance, I just want sim plic ity. So, if you want reas sur ance that you’re build ing some thing great, make sure you mea sure and ana lyze those three.