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U.S. businesses are starting to feel the effects of a tighter economy and growing fear that we’re entering into a new economic recession. Recent Q3 startup funding data compiled by Crunchbase puts things into perspective:
Early-stage investment into new startups in the third quarter of 2022 totaled less than half its levels from the same quarter in 2021. The report also showed investment in Q3 being down 37% from Q2.
At the same time, consumer spending rose just 0.4% in the third quarter of the year, which doesn’t seem to instill much confidence among economists.
These macroeconomic conditions are creating major growth challenges for many business-to-consumer (B2C) startups, which historically have relied on a steady flow of funds from consumers and investors to thrive.
To battle growth ruts and survive this looming period of uncertainty, leaders must shift their time, attention and resources toward Key Performance Indicators (KPI) that make profit optimization, efficiency and sustainable business growth possible in the months ahead and beyond.
Here are three key KPIs to focus on:
1. Burn multiple
Burn multiple is a KPI first introduced by venture capitalist and investor David Sacks, who created it to help startups and investors understand how to measure capital efficiency easily.
In his 2020 Medium post introducing the concept and purpose of burn multiple, Sacks wrote that “while growth is always prized during good times or bad, investors increasingly scrutinize burn and margins during downturns. Startups whose burn is too high relative to their growth will find it hard to fundraise. Founders should be prepared for this shift in emphasis.”
To find your burn multiple, simply divide your net burn by net new revenue for a given period.
When you calculate this number, you (and your investors) gain a better understanding of the proportion of your company spending to your incremental revenue or ARR.
Related: Focus on These KPIs for Franchise Success
A lower Burn Multiple indicates more efficient growth. A higher burn multiple indicates less efficient growth. In other words, if your burn multiple is high, you’re burning a lot of money (maybe even unsustainably) to generate revenue.
Investors have been increasingly focused on gathering this metric when evaluating the operational efficiency of their portfolios. In an article published earlier this spring by Future, a16z partners Justin Kahl and David George said, “we like burn multiples more than other efficiency metrics for recalibrating when market conditions change because they are all-encompassing of your business activities. Unlike other efficiency scores (e.g., LTV/CAC) that focus just on sales and marketing, actions you take across every business function will impact your burn multiple.”
If you find that your burn multiple is too high and you want to improve efficiency, take intentional, strategic steps to lower your Customer Acquisition Cost (CAC), improve your LTV or find other ways to cut costs to improve your gross margin.
2. Customer lifetime value (LTV)
It’s true, even in a recession, that too many marketers put a lot of focus on (expensive) customer acquisition and not nearly enough on maximizing the value of the customer after the first purchase.
This mistake must be remedied if you want to keep driving growth and profitability over the next few months. Measuring customer lifetime value (LTV) can help you focus more attention and resources on pulling more value (revenue) out of your existing customer base.
If you’re selling a subscription product, use one of these formulas shared by Baremetrics to measure LTV:
- Formula one: LTV = ARPU (average monthly recurring revenue per user) × Customer Lifetime
- Formula two: LTV = ARPU / User Churn
If you’re not marketing for a business with a subscription model, a better formula is the LTV/CAC ratio, which measures a customer’s lifetime value over the cost of acquiring that customer.
If you want to increase customer lifetime value, there are several tactics you can test. One easy-to-implement tactic is simply sending more emails and SMS messages to customers after purchasing a product from you. You can use these touchpoints to promote additional products, offer education, share reviews, and send customer-only promotions.
Another good tactic that can help increase LTV is to create referral and loyalty programs that reward customers for making additional purchases or convincing their friends to buy your products.
A final tactic worth investing in: offer amazing support to your customers. Listen and respond to feedback and questions in emails, social media posts and customer reviews. It’s much more expensive to acquire a new customer than it is to retain existing customers, so it’s in your best interest to keep the customers you have happy and loyal.
The common thread in these tactics: they’re significantly less expensive than the advertising costs it generally requires to bring new customers into your business.
Related: How to Calculate, Track and Boost Your Customer Lifetime Value
3. Incrementality over last-click attribution
Marketers have historically relied heavily on last-click attribution — when you credit the final touchpoint in the buyer journey as the reason why they ultimately decided to buy from you — when assessing the value of their marketing campaigns.
But over-relying on last click can ultimately lead you to make the wrong decisions about how to invest, reinvest or scale your performance budget.
Why? Because last click doesn’t tell you the full story. It doesn’t take into consideration all the touchpoints, experiences, and factors throughout the buying process that could have made an impact on a customer’s final decision to purchase.
To overcome this challenge, the first step is to accept that multiple touchpoints contribute to the purchase of your product.
From there, your goal should be to measure each channel and campaign incrementally in your arsenal. You can experiment with match market testing, lift testing and media mix modeling. A common outcome of the deeper analysis is a reallocation of your marketing spend into a broader swath of channels and away from over-reliance on the performance-heavy, typically very expensive options of Google and Facebook.
Related: 3 Steps to Set Up Sales KPIs That Actually Work
Final thoughts
No matter what the overall economy is doing, you can take control of the levers that will continue to drive your growth. If you’re starting to feel growth slow, don’t wait for it to worsen. Instead, start making strategic changes and decisions based on your Burn Multiple, LTV and the incremental impact of your channels and campaigns.
This article is from Entrepreneur.com
