In the world of startups and investments, metrics are critical tools for assessing a company’s health, growth potential, and scalability. While these numbers often serve to impress investors, their true value lies in guiding founders toward actionable insights. Metrics are not just about storytelling—they are about building clarity around what is working and what isn’t, enabling better decision-making.
Here are 15 essential metrics, refined to help entrepreneurs evaluate their businesses effectively, with a focus on learning and optimization rather than mere fundraising. These metrics, when properly understood and implemented, can illuminate the levers that drive sustainable growth and operational efficiency.
1. Bookings vs. Revenue
Many confuse bookings with revenue, but they serve distinct purposes:
- Bookings: The total value of signed contracts between the company and its customers, reflecting future commitments.
- Revenue: Recognized earnings based on services delivered, aligned with accounting standards like GAAP.
Mislabeling verbal agreements or non-binding commitments as bookings or revenue can misrepresent a company’s true financial position. Precision is essential.
2. Recurring Revenue vs. Total Revenue
Recurring revenue signals stability and scalability, while one-time income offers less predictability:
- Annual Recurring Revenue (ARR): Tracks income streams that repeat annually, excluding one-off fees.
- Monthly Recurring Revenue (MRR): A monthly equivalent of ARR that provides more granular insights.
Investors prioritize recurring revenue because it demonstrates consistent demand and sustainable customer relationships.
3. Gross Margin and Contribution Margin
Revenue growth alone is insufficient—profitability is what determines scalability:
- Gross Margin: Revenue minus direct costs (e.g., production, delivery). A higher gross margin indicates operational efficiency and pricing power.
- Contribution Margin: Revenue minus all variable costs, helping identify the profitability per unit of service or product delivered.
Understanding what drives these margins enables smarter pricing and cost management strategies.
4. Total Contract Value (TCV) vs. Annual Contract Value (ACV)
Contracts can vary in duration and structure, so it’s vital to distinguish between:
- TCV: The total monetary value of a customer contract, including one-time fees.
- ACV: The annualized revenue from a contract, standardizing comparisons across varying lengths.
Growth in ACV suggests increasing customer reliance and value perception over time.
5. Lifetime Value (LTV)
LTV estimates the net value a customer contributes over their relationship with the company. It helps assess how much a business can afford to spend on acquiring new customers:
- LTV Calculation:
- Revenue per customer per month = Average order value × Number of orders.
- Contribution margin per customer = Revenue − Variable costs.
- Average lifespan of a customer = 1 / Monthly churn rate.
When paired with Customer Acquisition Cost (CAC), LTV reveals the profitability and efficiency of customer acquisition strategies.
6. Gross Merchandise Value (GMV) vs. Revenue
In marketplace models, GMV and revenue often get conflated:
- GMV: The total transaction volume processed through the platform, indicating marketplace scale.
- Revenue: The platform’s share of GMV (e.g., transaction fees or commissions).
Focusing solely on GMV without understanding revenue dynamics can overstate a platform’s profitability.
7. Deferred Revenue and Billings
In subscription-based models, deferred revenue (upfront payments for future services) is an important metric:
- Deferred Revenue: Recorded as a liability until services are delivered.
- Billings: Revenue plus changes in deferred revenue, offering a forward-looking view of growth.
Billings growth indicates strong momentum from new contracts or upsells, while deferred revenue reflects the value of future obligations.
8. Customer Acquisition Cost (CAC)
CAC measures the cost of acquiring a new customer, but it’s critical to segment it for clarity:
- Blended CAC: Includes all acquisition channels (organic and paid), giving a broad overview.
- Paid CAC: Focuses solely on paid channels, offering insights into the efficiency of marketing spend.
A high CAC may indicate inefficiencies, especially if it doesn’t align with the customer’s LTV.
9. Active Users
Defining “active users” is crucial, as vague definitions can mislead stakeholders:
- Specify what constitutes activity (e.g., transactions, logins, or interactions).
- Differentiate between first-time and repeat users to better gauge engagement.
A clear and consistent definition of activity builds trust in user engagement metrics.
10. Month-over-Month (MoM) Growth
Tracking growth month by month can reveal trends, but using Compounded Monthly Growth Rate (CMGR) offers a more accurate long-term perspective:
- CMGR Formula: CMGR=(Latest Month ValueFirst Month Value)1Number of Months−1CMGR = \left(\frac{\text{Latest Month Value}}{\text{First Month Value}}\right)^{\frac{1}{\text{Number of Months}}} – 1CMGR=(First Month ValueLatest Month Value​)Number of Months1​−1 CMGR smooths out volatility, making growth rates comparable across businesses.
11. Churn (Gross and Net)
Churn measures customer or revenue loss over time:
- Gross Churn: Lost revenue or customers as a percentage of total revenue or users.
- Net Churn: Gross churn minus upsells or expansions.
While gross churn highlights retention challenges, net churn shows how effectively a business offsets losses.
12. Burn Rate
The rate at which a company spends cash is a critical health metric:
- Gross Burn: Total monthly expenses.
- Net Burn: Expenses minus incoming revenue.
Understanding burn rate helps businesses forecast runway and prioritize cost control.
13. Engagement Metrics Over Vanity Metrics
Metrics like app downloads or page views can be misleading. Instead, focus on engagement metrics that reflect value creation:
- Examples: Daily Active Users (DAU), Monthly Active Users (MAU), or customer retention by cohort.
Engagement metrics provide a deeper understanding of user satisfaction and product fit.
14. Presenting Growth Metrics vs. Cumulative Data
Cumulative metrics, like total revenue or user growth, can paint an overly optimistic picture. Investors prefer to see periodic metrics such as:
- Monthly revenue growth.
- New customer acquisition rates.
These metrics better illustrate momentum and scalability.
15. Honest Visualization
Presenting data accurately is just as important as the data itself:
- Label axes clearly.
- Avoid exaggerating growth with skewed scales.
- Combine percentage growth with absolute values for context.
Transparency in visualizations builds credibility and fosters trust among stakeholders.
Conclusion
Metrics are more than just numbers—they are the foundation for understanding and improving a business. By focusing on the metrics that matter, founders can diagnose issues, identify opportunities, and steer their companies toward sustainable growth. While these metrics can impress investors, their primary value lies in helping entrepreneurs run smarter, more efficient businesses.
