Metrics: What and how to measure ?

If you are an entrepreneur, operator or investor you deal with metrics every day.?

Entrepreneurs and operators use metrics to track business performance and take informed business decisions. It brings in a sense of transparency and control and helps align the teams towards a north star goal. Investors look at metrics as part of the quantitative assessment of the business’s health.

What you measure and prioritise depends on the business model, sector, business goals and stage of the business.

While what you measure is important, how you measure and interpret is equally important and not more.

Over the course of the next few blogs I will try to cover some of the commonly used business metrics for B2B and B2C businesses.?

# 1 - Churn

Churn is a measure of how many customers stop using a company's product or service over a given period of time.?

It is a metric ideally suited for subscription based business models. Which means every SaaS business needs to measure it. It directly impacts revenue and growth and in any case it is always easier and cheaper to retain an existing customer than to acquire a new one.?

A high churn rate may mean one or more of the following (not exhaustive):

• Issues in the product. Doesn’t deliver what it promises.
• Not acquiring the right TG of customers due to Inefficient marketing or sales.
• Poor customer onboarding and support.
• Incorrect pricing.

While churn is one of the most important metrics for any subscription business, here are three important things that one should keep in mind while looking at churn.

1. Formula to calculate churn.

The most common formula that people use to measure churn is: (Number of customers lost during a period / Total number of customers at the beginning of the period) x 100

However this does not give a clear picture of the actual churn numbers.

For instance if you look at the below chart it appears that ‘Company 2’ has better churn numbers than ‘Company 1’ as no customer churned in the first 3 months.

This is because Company 2 is only selling quarterly subscriptions. Hence looking at monthly churn numbers will give an inaccurate picture for churn.

The more accurate formula therefore to measure churn is:?

?(Number of customers lost during a period / Total number of customers up for renewal drng that period) x 100

If you have different pricing plans (monthly, quarterly, annual) it is a good practice to measure the churn numbers for these plans in different cohorts.

2. Always look at revenue churn along with customer churn.

If we look at the below customer retention chart the numbers look very bad.

By just looking at this chart isolation, one would infer that the business is doing poorly and may have issues around product, marketing, customer success, etc.

However, if we combine it with revenue retention for the same time period, the numbers don’t look that bad. While the business has lost over 50% of the customers in 12 months the retained customers have led to a 130%+ revenue retention.?

Looking at both the charts together one can infer that while there is high churn, the retained users are loving the product and are spending more on it. Which means the business needs to find more of these customers and should tailor their GTM approach accordingly.

3. Always look at cohort level data.

Lot of times people say their churn is X% churn. This is incomplete information and it is hard to infer much from this absolute number.?

Cohort level data provides granular insights about the customers which aggregate level data cannot. These cohorts could be monthly, quarterly, half-yearly etc. depending on the business model and subscription plans. By looking at different cohorts one can understand how different customers behave over a period of time and can help identify what’s working and what's not based on churn numbers.

For instance one may experiment with different marketing strategies across two different time periods. Or may have made some tweaks to the product. Looking at cohort level data will help understand which marketing strategy works better (low churn cohort would mean the company is able to acquire the right TG of customers from that marketing campaign) or whether the product iteration helped in retaining the customers better.

Below is an ideal way of looking at cohort level data.?

In the next blog we will look at the at ARR/MRR metrics.