Opinions expressed by businesskinda.com contributors are their own.
US businesses are beginning to feel the effects of a tightening economy and growing fears that we are heading into another economic recession. Putting recent Q3 startup funding data compiled by Crunchbase into perspective:
Early-stage investments in new startups in the third quarter of 2022 totaled less than half the level of the same quarter in 2021. The report also showed that investment in Q3 was 37% lower than in Q2.
At the same time, consumer spending increased 0.4% in the third quarter of the year, which does not seem to inspire much confidence among economists.
These macroeconomic conditions create major growth challenges for many business-to-consumer (B2C) startups, which have historically relied on steady cash flows from consumers and investors to thrive.
To counter growth lags and survive this looming period of uncertainty, leaders must shift their time, focus, and resources to Key Performance Indicators (KPIs) that enable profit optimization, efficiency, and sustainable business growth in the months ahead and beyond.
Here are three key KPIs to focus on:
Contents
1. Burn several
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 easily measure capital efficiency.
In his 2020 Medium mail Sacks introduced the concept and purpose of burn multiple, writing that “while growth is always valued in good times or bad, investors will increasingly scrutinize burn and margins during recessions. Startups whose burn is too high relative to their growth, will find it difficult to raise money. Founders must be prepared for this shift in emphasis.”
To find your burn multiple, simply divide your net burnout by the net new revenue for a given time period.
Calculating this number will give you (and your investors) a better understanding of the proportion of your business expenses relative 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 unsustainable) to generate income.
Investors are increasingly focused on collecting this metric when evaluating the operating efficiency of their portfolios. In a article published earlier this spring by Futuresaid a16z partners Justin Kahl and David George, “We like burning multiples more than other efficiency metrics to recalibrate when market conditions change because they are all-encompassing to your business. Unlike other efficiency scores (e.g. LTV/CAC) that focus only on sales and marketing, actions you take in every business function will affect your burn multiple.
If you feel your burn multiple is too high and you want to improve efficiency, take deliberate, strategic steps to lower your Customer Acquisition Cost (CAC), improve your LTV, or find other ways to cut costs to increase your improve gross margin.
2. Customer lifetime value (LTV)
It’s true, even in a recession, that too many marketers focus too much on (expensive) customer acquisition and not nearly enough on maximizing customer value after the first purchase.
This flaw needs to be fixed if you want to continue driving growth and profitability in the coming months. Measuring customer lifetime value (LTV) can help you focus more attention and resources on extracting more value (revenue) from your existing customer base.
If you sell a subscription product, use one of these formulas shared by Baremetrics 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 the lifetime value of a customer versus the cost of acquiring that customer.
If you want to increase customer lifetime value, there are several tactics you can test. An easy tactic to implement is simply to send more emails and text messages to customers after they buy a product from you. You can use these touchpoints to promote additional products, provide education, share reviews, and send special offers to customers.
Another good tactic that can help increase LTV is to set up referral and loyalty programs that reward customers for making additional purchases or convincing their friends to buy your products.
One last tactic worth investing in: Provide great support to your customers. Listen to and respond to feedback and questions in emails, social media posts, and customer reviews. It is much more expensive to acquire a new customer than it is to retain existing ones, so it is in your best interest to keep the customers you have happy and loyal.
The common thread running through these tactics is that they are significantly less expensive than the advertising costs typically required to bring new customers to your business.
Related: How to Calculate, Track, and Drive Your Customer’s Lifetime Value
3. Incrementality over last click attribution
Marketers have traditionally relied heavily on last-click attribution — when you consider the last touch point in the buyer journey as the reason they finally decided to buy from you — when assessing the value of their marketing campaigns.
But relying too much on the last click can ultimately lead you to make the wrong decisions about how to invest, reinvest or scale your performance budget.
Why? Because the last click doesn’t tell you the full story. It does not consider all touchpoints, experiences, and factors during the buying process that may have influenced a customer’s final purchasing decision.
To overcome this challenge, the first step is to accept that multiple touchpoints contribute to your product purchase.
From there, your goal should be to incrementally measure each channel and campaign in your arsenal. You can experiment with match market testing, lift testing, and media mix modeling. An overall result of the deeper analysis is a reallocation of your marketing spend to a wider range of channels and away from an over-reliance on the performance-intensive, usually very expensive options of Google and Facebook.
Related: 3 steps to set sales KPIs that actually work
Final thoughts
Whatever the overall economy is doing, you can take control of the levers that will continue to drive your growth. If you notice growth starting to slow down, don’t wait for it to get worse. Instead, start making strategic changes and decisions based on your Burn Multiple, LTV, and the incremental impact of your channels and campaigns.
Janice has been with businesskinda for 5 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider businesskinda team, Janice seeks to understand an audience before creating memorable, persuasive copy.