The Key Business Metrics That Really Matter

Thursday May 19, 2011 by Brian Zimmerman - Managing Director, OpenView Venture Partners

When startup and expan­sion stage com­pa­nies are court­ing ven­ture cap­i­tal­ists and seek­ing invest­ments, it’s easy for them to get caught up in mind-numbing met­rics that show the sound­ness of their eco­nomic model and the business’s sharp growth trajectory.

And in that sce­nario, busi­ness met­rics are extremely impor­tant.

Ven­ture cap­i­tal firms want to see tons of data, mod­els, and infor­ma­tion that speak to a company’s long-term health. Met­rics can cer­tainly do that. They can also help com­pa­nies scale their teams, act on low per­form­ers, drive toward rev­enue goals, and pre­dict and influ­ence outcomes.

But when you’re focus­ing on day-to-day oper­a­tions, the best prac­tice is to keep it simple.

Yes, I know there are a lot of impor­tant met­rics and that each one has a spe­cific pur­pose. But I’m a sim­ple man look­ing for sim­ple answers. With that in mind, I’ve boiled the myr­iad met­rics out there down to the three that tell a great story and indi­cate that some­thing great is happening.

So, when you don’t have investors ask­ing for pages of data and you’d like to keep your san­ity, I sug­gest using these three:

1. New busi­ness vs. sales and mar­ket­ing expense

If your new busi­ness exceeds your sales and mar­ket­ing expenses, then you know that you’re build­ing a sound model. That sort of pro­por­tion gen­er­ally means that you have a sound sales process and you’re get­ting closer to the oppor­tu­nity to build a scal­able model.

Mar­ket­ing­Profs pres­i­dent Roy Young exam­ines the prin­ci­ple of this met­ric in far greater detail on his blog. But here’s the sim­ple truth: you must make more money from a cus­tomer than you spend to acquire them. Oth­er­wise, it’s going to be tough to succeed.

2. Renewal rates greater than 85%

This met­ric is par­tic­u­larly impor­tant to soft­ware com­pa­nies that exe­cute a SaaS model. If that’s you, this met­ric will help gauge cus­tomer ser­vice and the health of your company’s annual rev­enue. If your renewal rates are greater than 85 per­cent and your cus­tomers like you, then you’re prob­a­bly in good shape.

As John War­rilow argues at Built to Sell, busi­nesses with a sub­scrip­tion model must live and die by their renewal rate. If it’s between 80 and 90 per­cent, then they can spend less time scram­bling to replace cus­tomers and more time focus­ing on new cus­tomer acqui­si­tion. For SaaS com­pa­nies, a renewal rate of greater than 85 per­cent means they’ll at the very worst tread water and very likely expe­ri­ence rapid growth.

3. High gross margin

This is the ulti­mate metric. In my expe­ri­ence, com­pa­nies that reach a gross mar­gin of 70 per­cent are really begin­ning to emerge and put their foot on the throt­tle. Nev­er­the­less, the higher your gross mar­gin, the health­ier the com­pany is bound to be.

Investors tend to pay a lot of atten­tion to gross mar­gin as one of a company’s vital signs. As Harry Domash explains at MSN Money, ris­ing gross mar­gins indi­cate that a com­pany is either reduc­ing costs or rais­ing prices to meet mar­ket demand. Either way, high gross mar­gin gen­er­ally trans­lates to a higher profit mar­gin and allows a com­pany to invest in grow­ing the business.

Ted Hurl­but at Inc.com goes into greater detail about gross mar­gin, list­ing sev­eral rea­sons why it’s crit­i­cal that small busi­nesses focus on it. Man­ag­ing and mon­i­tor­ing gross mar­gin on a reg­u­lar basis will cut down on monthly and quar­terly bud­get sur­prises, and allow com­pa­nies to bet­ter pre­dict prof­itabil­ity, cash flow, and productivity.

Keep it sim­ple (and accurate)

As with any busi­ness met­ric, it’s obvi­ously impor­tant to make sure the infor­ma­tion you gather on all of the met­rics above is timely and accurate.

Barry Trailer at CSO Insights explains why on his blog, using data from a sales opti­miza­tion sur­vey he exe­cuted last year. In every sin­gle area of his sur­vey, man­agers who relied on accu­rate met­rics vastly exceeded expec­ta­tions and were able to pro­pel the com­pany forward.

So, which busi­ness met­rics are you using?

I real­ize that the three met­rics I men­tioned above aren’t the only impor­tant ones. But when it comes to mon­i­tor­ing a business’s over­all per­for­mance, I just want sim­plic­ity. So, if you want reas­sur­ance that you’re build­ing some­thing great, make sure you mea­sure and ana­lyze those three.

Brian Zim­mer­man is a Man­ag­ing Direc­tor at Open­View respon­si­ble for deliv­er­ing value-add con­sult­ing ser­vice through OpenView Labs. You can fol­low him on Twit­ter @BrianZimm1.

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