How to use metrics to decide when your startup should spend, raise or pivot

Like most tech startups, we at BugHerd make sure to continuously record a number of different metrics.

Making decisions off the back of hard data is always preferable, but in the daily chaos of early stage startups founders can often neglect to connect the dots. Here’s how to use your data to make more informed choices, in three decisions all founders will someday face.

Where should I spend my marketing budget?

To get the most out of your advertising dollars, not only do you want to drive visitors to your site as cheaply as possible but you also want them to spend money when they get there.

Though the required data will rarely be in the same place for each channel, find or derive your cost per click (CPC) for each. The next step is to work out what each of those clicks are worth to you.

Different marketing channels will convert to paid at different rates and they’ll spend differently too. By multiplying a channel’s conversion rate by this average value you’ll find its value per click.

Dividing value per click by your CPC will give you your return on investment (ROI) for that particular campaign and channel. As you track your ROIs over time, you’ll be able to identify where your money performs best.

Watch out for:

  • You can get at an equivalent CPC for promotions like paid articles by dividing the number of new visitors by the total cost.
  • “Free” marketing activities often are more burdensome on your time. Account for this when tallying up the all of the campaign costs.
  • Even once you’ve established a few high-performing channels, put aside some money each campaign period for discovering new ones.
  • The way you calculate average value per customer depends on your monetization structure. Subscriptions businesses for example would use the sum of churn-discounted future cash flows, minus any marginal costs

Will we need to raise more money?

It’s a question faced by many startups at multiple points in their life.

Your revenues are growing but you’re not sure whether you’ll hit profitability before you run out of cash. Or, perhaps you want to take on a few more hires and want to see if your startup can bear them.

Based on historical data and any expectations you may have, project out your future monthly revenues and expenses. The difference between these is the profit/loss for each future month and, taken cumulatively, it will dip down into the negatives as you burn cash right up until profitable. If it dips down further than you have cash in the bank, you’ll need to take a good hard look at how much you’re spending or start raising capital.

On the other hand, if the cash you’re sitting on is sufficient to sustain the company through even your worst case scenarios it may be time to spend more aggressively on growth or more speculative and longer-term projects.

Some startups in this position may even consider doing the opposite of raising—using capital surpluses to buy back investor shares.

If you’ve got a few months of financial history behind you, I’ve put together an excel model that illustrates this.

Am I working on the right things or should I consider pivoting?

One of the more difficult part of managing a startup is realising that your assumptions were flawed and that the best course of action is to abandon one path and try another.

There are a number of metrics you can watch to help validate your decisions to continue working on a product or feature—one way or another.

If you’re trying something new with an existing userbase, track user engagement as you roll out the change in stages. SaaS startups in particular can easily add a feature or change to 20% of their existing userbase, and then compare engagement between the two user pools.

The exact metrics you check will depend on the product and change in question, but should always stem from the hypothesis you made when the feature was first planned. Perhaps you believe that some UI changes will increase your Net Promoter Score, or that reworking the checkout process will lead to fewer abandoned baskets. Either way, you’ll soon know whether or not your assumptions hold up.

To evaluate the ongoing validity of a subscription product, it’s useful to track how your month on month revenue growth approaches your churn rate.

While explosive growth remains the holy grail of startups, many companies eventually settle into adding some predictable amount of users each month. If the number users that churn stays at some stable proportion of your userbase, eventually the total users leaving will grow to match the users added each month and net growth will tend to zero.

You can determine where this will happen by dividing the new users added each month by the churn rate. For example, if you add $20,000 in new subscriptions each month but are losing old subscribers at 5%, your monthly revenues will cap out at 20000/0.05 = $400,000 unless you can adjust either input.

If your revenues for one product or another are reaching this limit and you have exhausted your options to increase growth or curtail churn, it’s time to start looking at adjacent opportunities.

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