Flying Blind: Why New Businesses Crash Without the Right Metrics
In our fast-paced world, data isn't just king — it's the lifeline keeping companies afloat. Neglecting key business metrics almost always turns promising ventures into cautionary tales.
Imagine launching a new product to enthusiastic acclaim. Users are flooding in, engagement seems high, and the future looks bright. But beneath the surface, a lack of insight into critical metrics could be steering your company toward disaster. Not tracking who your users or customers are, how they're engaging, and whether they're sticking around, is essentially like trying to fly an airplane with no instruments — or in the case of a start-up, like trying to drive a Formula-1 car blindfolded.
As someone who has held various interim-CFO positions, I am often asked by new clients what metrics to track to improve internal decision-making and which to report to outside shareholders. Over the years, I have come to believe that a firm command and deep understanding of the most important metrics of your business, as well as the ability to eloquently speak about them, is a hallmark of all great leaders.
Here I offer an overview of what I think the most important metrics are and why.
The Invisible Instrument Panel
Many businesses make the mistake of launching a new product without basic metrics in place. They revel in the initial success but have no idea if users are returning or churning. Without this data, they're unable to refine their product, address issues, or understand their market fit.
On the other end of the spectrum, some executives become obsessed with data, tracking hundreds of metrics before even establishing a solid user base. This data overload can lead to analysis paralysis, where minor details overshadow significant strategic decisions.
Striking the Right Balance
The key is to focus on a select few metrics that truly matter, especially in the early stages. Here are the critical metrics leaders need to prioritize:
1. Revenue (— duh)
Why It Matters:
Revenue is the most direct indicator of business success, particularly for B2B companies. It reflects market validation and the effectiveness of your sales strategies. Unlike vanity metrics such as page views or user sign-ups, revenue is hard evidence that customers value your product enough to pay for it.
Pitfalls to Avoid:
Vanity Metrics: Be wary of inflating performance with metrics like Gross Merchandise Value (GMV) or Gross Transaction Value (GTV) that don't directly contribute to your bottom line. These figures can be misleading, giving a false sense of success while the actual revenue remains stagnant.
Real-World Insight:
A travel- or fintech company might boast about processing billions in transaction volume, but if the revenue generated from those transactions is minimal, the high GMV is just a vanity metric. Focus on the revenue that impacts your profitability.
2. Cash Burn
Burn-Rate:
Definition: The net amount of cash your company loses each month post product-launch (monthly expenses minus revenue).
Why It Matters: Measure at what rate it is going up or declining by. Understanding your burn rate helps you gauge how quickly you're depleting your cash and whether your launch is going to plan or not. It's essential for planning, budgeting, and avoiding unexpected financial crises — not just for start-ups but for larger companies launching a new product also!
Runway (mostly relevant for start-ups):
Definition: The amount of time you have before your company runs out of cash at the current burn rate.
Why It Matters: Your runway dictates how long you can operate before needing additional funding. It influences strategic decisions, such as when to scale operations or when to start raising the next funding round.
Real-World Insight:
If your burn-rate is $100,000 per month and you budgeted $1 million, you have up to a 10-month runway unless your burn-rate reduces. This finite timeline may necessitate strategic planning to either reduce expenses, increase revenue, or secure additional funding before time runs out.
3. Customer Retention (or Churn)
Why It Matters:
Retention rates reveal whether your product meets customer needs and fosters loyalty. High retention indicates product-market-fit, a sustainable business model and reduces the need for constant new customer acquisition, which can be costly.
How to Measure:
Cohort Analysis: This involves grouping customers based on shared characteristics or timeframes (such as the month they signed up) and tracking how these groups behave over time.
Cohort Analysis Explained: Imagine you acquire 100 customers in January (your January cohort). Cohort analysis tracks how many of these customers continue to use your product in subsequent months. By stacking monthly cohorts on top of each other in a visual graph, you can see patterns of retention and attrition.
Layer Cake Visualization: With high retention, cohorts build upon each other like layers in a cake, leading to cumulative growth over time. If retention is low, the cohorts thin out quickly which indicates a greater need for new customer acquisition. It is a bit like having a bucket with holes — no matter how much you pour in, it never fills up completely.
Real-World Insight:
High retention rates are the backbone of subscription-based businesses like SaaS companies, most high-quality news media businesses, or streaming services. They rely on consistent revenue from existing customers rather than perpetually chasing new ones.
4. Net Money Retention Rate (NMRR)
Definition:
The Net Money Retention Rate (NMRR) measures how much recurring revenue from existing customers is retained over a specific period, including upsells, cross-sells, and down-sells. It's expressed as a percentage of the revenue at the beginning of the period.
Why It Matters:
An NMRR above 100% means your existing customer base is becoming more valuable over time. Not only are you retaining customers, but each customer is generating more revenue for your business. This might be because your customers are using the product more or because you're expanding revenue through upselling and cross-selling. This measure indicates strong product-market fit and customer satisfaction.
How It Works:
Initial MRR: Start with your Monthly Recurring Revenue (MRR) from a cohort of existing customers.
Churn: Subtract revenue lost from customers in that cohort who downgraded or left.
Expansion: Add revenue gained from customers in that cohort (not new customers!) who upgraded or purchased additional services.
Calculation: NMRR = ((Initial MRR - Churn + Expansion) / Initial MRR) * 100%
Real-World Insight:
Consider a SaaS company that provides project management tools. If clients find increasing value in the platform, they might add more users or purchase premium features, leading to higher NMRR. Payment processors like Stripe also benefit from clients who grow over time. As a customer's transaction volume increases, so does Stripe's revenue from processing fees. This growth reflects in a high NMRR, showcasing a symbiotic relationship where the company grows alongside its customers' success.
5. Gross Margin
Definition:
Gross margin is calculated by subtracting the Cost of Goods Sold (COGS) from Revenue and then dividing by Revenue. It reflects the percentage of revenue that exceeds the direct costs associated with producing your product or service.
High-Margin Businesses: Software companies often have high gross margins because the cost of delivering software to an additional customer is minimal.
Low-Margin Businesses: Companies that require significant operational costs, like manufacturing or logistics, have lower gross margins.
Why It Matters:
Gross margin indicates the efficiency of your business operations and the level of effort required to generate profit. High gross margins mean you retain more revenue per sale, providing more capital for growth, R&D, and other expenses.
Effort vs. Profit: A high-margin business requires less effort to make the same amount of profit compared to a low-margin one. This efficiency can be a significant competitive advantage.
Business Model Optimization: Companies can improve gross margins by shifting their business model. For example, instead of offering services directly, a company might create a platform enabling others to provide services, reducing operational costs.
Hidden Costs: It is vital to reflect ALL costs in COGS even if they're not currently having a cash impact. For example, start-ups utilizing third-party AI services must account for API usage costs. Ignoring these costs can inflate gross margins artificially. Accurate accounting ensures sustainable pricing strategies and business models.
Real-World Insight:
Companies like Airbnb and Uber operate platforms rather than owning the assets (homes or cars). This model allows them to generate revenue without the significant costs associated with owning and maintaining physical assets, leading to higher gross margins. But some companies, particularly in sectors like delivery or ride-sharing, have attempted to scale businesses with negative gross margins, subsidizing costs to acquire users rapidly. This approach is risky and often unsustainable, especially in an environment where investors are cautious about funding companies without clear paths to profitability.
Capital Intensive: Scaling negative-margin businesses requires significant capital to cover losses, which may not be sustainable in the long term.
Market Saturation Risks: Relying on funding to subsidize costs can be detrimental if competitors emerge or investor sentiment shifts.
Grocery Delivery Start-ups: Many have struggled because the operational costs (couriers, logistics, perishable goods) outweigh the revenue generated, leading to slim or negative gross margins.
Alternative Approaches: Companies might pivot to a software-as-a-service model, offering their logistics platform to other businesses to improve margins.
Best Practices for Tracking Metrics
Implement Early: Establish key metrics before launching your product. Early data provides valuable benchmarks for growth and improvement.
Consistency is Key: Use clear, standardized definitions for each metric across your organization to ensure accurate tracking and analysis.
Focus on Actionable Data: Prioritize metrics that inform strategic decisions and have a direct impact on your business objectives.
Avoid the Trap of Vanity Metrics: Vanity metrics are figures that look impressive but don't provide meaningful insights into business health. Examples include: Page Views (high numbers don't necessarily translate to engagement or revenue), App Downloads (downloads without active usage offer little value), and Social Media Followers (a large following doesn't guarantee customer conversion). Focusing on these can create a false sense of success. Instead, zero in on metrics that directly correlate with revenue and customer engagement.
Stay Transparent: Be honest with yourself and stakeholders about your metrics, even when they don't meet expectations. Transparency fosters trust and enables timely corrective actions.
Balance Data with Intuition: While metrics are vital, they shouldn't replace customer interactions. Regularly engage with users to gain qualitative insights that numbers can't provide.
The Human Element
Despite the importance of data, there's no substitute for direct customer engagement. Leaders should prioritize getting out of the building to interact with users, gather feedback, and understand their experiences first-hand. Brian Chesky of Airbnb, for instance, is said to continue to host guests at his own home to stay connected to user experiences.
This human touch complements quantitative data, providing a holistic view of your business's performance and areas for improvement.
Customer Feedback Loops: Establish regular channels for customer feedback to identify pain points and opportunities.
Product Iteration: Use insights from customer interactions to inform product development and enhancements.
Conclusion
The right metrics serve as your navigational instruments, as you pilot your business through turbulence and toward success. By focusing on essential metrics like revenue, cash burn, customer retention, the net money retention rate, and gross margin, leaders can avoid blind-spots and make informed decisions that propel their companies forward.
Recapping how each metric matters deepens your strategic insight:
Revenue validates your business model.
Cash Burn measures the success of your new business launch and ensures financial sustainability.
Customer Retention indicates product-market fit and customer satisfaction.
The Net Money Retention Rate shows growth within your existing customer base.
Gross Margin reflects operational efficiency and profit/growth potential.
Avoid the extremes of flying blind without data or becoming paralyzed by an overload of metrics. Strike a balance that leverages data for strategic insight while maintaining a strong connection with your customers.
After all, in the journey of building a successful business, it's the combination of accurate instruments and a keen understanding of the terrain that ensures you don't just take off — but soar.
