The growth of a company never follows a linear graph. Growth happens simultaneously across various spheres in the ecosystem of a business, like products, consumer base, revenue, conversion rates, services, etc. In order to track the holistic growth of a company, it is essential to keep track of the all-around growth of the company.
Growth metrics are the key numbers that help make sense out of the historical data of a company and also create trend charts for making predictions for the future flow of the business. This entire activity is driven by objective numbers, making the results neutral and true; the results from the growth analytics performed using historical data are reflective of company performance in a way.
Tracking growth metrics is essential to understand how to manage the operations and workflows so that desired progress is achieved. To be able to strategize better and drive your business towards its vision, studying growth metrics becomes imperative.
Let’s get to know growth metrics a little better by understanding the following aspects of it:
- What are Growth Metrics?
- Why are Growth Metrics Important?
- 12 Key Growth Metrics Every Business Must Track
What are Growth Metrics?
Growth metrics are, in a way, the key performance indicators of your business. All the important numbers your business tracks – conversion rates, product growth metrics, email click-through rates – are counted under the umbrella of growth metrics.
Rather than having a separate growth analysis for each one of these numbers, the growth metrics gather them all in one place, showing you a complete picture of the progress your business is making (or the losses it is shouldering). The best advantage of having growth analytics in place is that based on historical growth trends, you can make informed decisions to better direct growth for the future, reallocate resources, hire manpower, and plan operations accordingly.
Why are Growth Metrics Important?
Doing business isn’t only about creating profits at the end of the day. There has to be some visibility into your future trajectory regarding where the business is going, how you plan to expand its operations, and what the best way is to achieve that. Tracking your growth metrics is the first step that gets you closer to making data-driven decisions backed by sound insights.
Knowing where your strategies are failing helps you regroup in the nick of time, preventing business catastrophes and encouraging a good balance of safety and risks in business.
Growth metrics need to be regularly tracked and acted upon.
12 Key Growth Metrics You Should be Tracking
The following key growth metrics directly paint a picture of your business’s progress. Let’s see what they are.
Every company has certain action milestones that help it understand how likely a consumer is to come back to it. When a consumer completes one such milestone, the business can then label him accordingly for the marketing teams to approach the user depending on the stage of interaction he is in.
Activation rate is a measurable number that tells a business about how many of the total numbers of users completed a particular milestone or performed a key action with the company app, landing page, website, etc. Mathematically, the activation rate can be calculated as follows:
Activation Rate = (Consumers that complete a milestone action / Total users who signed up) x 100
Depending on your industry and the milestone that you are tracking, the activation rate will change. For example, let’s say there were 500 users that downloaded your application, while 175 users completed your set milestone of creating their profile and sharing a recommendation with friends. Based on this data, you can calculate the activation rate as follows:
Activation rate = (175 / 500) x 100
Activation rate for your milestone = 35%
Annual Returning Revenue
This is a key growth metric that tells you about the revenue an investment has generated over a period of one year with respect to the capital invested in it. In simpler terms, it can be expressed as your ROI calculated for a particular investment for a period of one year.
The formula to calculate the rate of annual returning revenue is as follows:
Annual Returning Revenue = [(Present Total Value of Investment – Initial Value of Investment) / Initial Value of Investment] x 100
For example, say that your business invested $100,000 in the stock market, which grew to $125,000 in a year. Based on this data, you can calculate the annual returning revenue as follows:
Annual returning revenue rate = [($150,000 - $100,000) / $100,000] x 100
Annual returning revenue rate = 25%
Monthly Recurring Revenue
Monthly recurring revenue is an important metric to track for companies that function on a subscription basis, for example, Spotify. This growth metric tells about the earnings that a company generates every month and helps give visibility into the income stream that can be expected further down the year.
The mathematical formula to calculate the monthly recurring revenue growth metric is as follows (all values for a specific month):
Monthly recurring = (Revenue averaged per customer x total number of accounts)
For example, say that your company earns $50 on average for every account that a customer holds with you. Your business has 700 such accounts registered for the month of December. You can calculate the monthly recurring revenue as follows:
Monthly recurring revenue = $50 x 700 accounts
Monthly recurring revenue = $35,000
Average Revenue Per User
This growth metric helps quantify the profits a business earns for every customer who avails of its products or services, measured over a fixed period of time. It is sometimes also known as Average Revenue Per Unit, depending on the industry your business operates in.
Mathematically, average revenue per user is expressed as follows:
Average revenue per user = (Total revenue generated over the fixed time period / total number of users during that period)
Say, for example, that your company generated a revenue of $500,000 at the end of the year 2020, with a total user base of 20,000. Based on this information, you can calculate the average revenue per user as follows:
Average revenue per user = $500,000 / 20,000
Average revenue per user = $25
Revenue churn is a growth metric that gives insight into the loss of revenue due to failed subscription renewals. This growth metric measures the revenue loss of subscription dollars that were due for renewal but didn’t fall through.
The mathematical relation for calculating revenue churn for a given time period depends on the monthly recurring revenue (MRR) for that period. It can be calculated as follows:
Revenue churn = [(MRR at month-start – MRR at month-end) / MRR at month-start] x 100
Say, for example, that Spotify had $100,000 MRR at the beginning of a month, which fell to $75,000 at the end. The revenue churn can be calculated as follows:
Revenue churn = [($100,000 - $75,000) / $75,000] x 100
Revenue churn = 33.4%
Much like revenue churn, the churn rate is a growth metric that helps a business understand the fall in subscriptions. This growth metric quantifies the number of canceled or discontinued subscriptions in terms of percentage. The formula for calculation of churn rate growth metric is as follows:
Churn rate = [(Users at the beginning of a time period – users at the end of the same period) / Users at the beginning of a time period] x 100
Say, Netflix had 50,000 subscribers at the beginning of November, which fell to 37,000 by the end. Based on this information, the churn rate growth metric can be measured a follows:
Churn rate = [(50,000 – 37,000) / 50,000] x 100
Churn rate = 26%
Customer Retention Rate
Customer retention rate is a growth metric that all businesses want to get as high as possible – it tells you about how many of your customers are actually sticking with you. Technically, the number of customers or clients who continue subscriptions to your products or services can be understood through the customer retention rate.
Mathematically, it can be calculated as follows:
Customer retention rate = [(Users at the end of a time period – Users acquired during that period) / Users at the beginning of a time period] x 100
Let’s understand this with an example. Suppose YouTube Music starts December with 100,000 subscribers, and gains 80,000 more as the month progresses, and ends the month with 175,000 subscribers, the customer retention rate can then be calculated as follows:
Customer retention rate = [(175,000 – 80,000) / 100,000] x 100
Customer retention rate = 95%
Customer Acquisition Cost
This growth metric tells a business about the expenses it is incurring in acquiring a new customer. In other words, the cost that goes into converting a lead into a paying customer is customer acquisition cost. Mathematically, it is determined as follows:
Customer acquisition cost = (Total cost incurred in marketing, advertising) / total number of conversions
All the values are measured over the same time period. For example, say that Spotify expends a total of $100,000 in advertising its services and an additional $50,000 in marketing. The total conversions it generates equal 50,000 new customers. The customer acquisition cost can then be calculated thus:
Customer acquisition cost = $100,000 + $ 50,000 / 50,000
Customer acquisition cost = $3
Customer Lifetime Value
This growth metric is an important one for businesses to help identify their loyal customers and extend appropriate services to them. The customer lifetime value denotes the revenue that a business expects to make from a single customer over a period of time.
The formula for calculating this growth metric is as follows:
Customer lifetime value = Customer value x Average customer lifespan
Say, for example, that on average, a customer stays with your business for about 5 years. During that time, his value is $75 per year. Based on this data, the customer lifetime value can be calculated as follows:
Customer lifetime value = $75 x 5
Customer lifetime value = $375
Customer Lifetime Value and Customer Acquisition Cost Ratio
This growth metric is a ratio between the cost of acquiring a customer and the revenue that the customer is likely to provide a company with. Basically, it tells you about how lucrative it has been to acquire the customers that a company has. Mathematically, the equation goes thus:
CLV : CAC = Customer lifetime value / Customer acquisition cost.
Let’s continue with the examples taken previously. The CLV calculated was $375, while the CAC was $3. The ratio would thus be:
CLV : CAC = $375 / $3
CLV : CAC = 125 : 1
This essentially means that for every dollar that a company spends to acquire a customer, there is a revenue of $125 made.
Lead to Customer Conversion Rate
This growth metric is also known as sales conversion rate or simply conversion rate. It is the single most important sales growth metric that businesses track without fail. It tells you about how many leads are actually converting into paying customers. Mathematically, it is represented as follows:
Conversion rate = (Total converted leads / total number of leads) x100
Say, for example, that Spotify generated a total number of 50,000 leads with its marketing efforts, out of which 37,000 converted into customers. The conversion rate can then be calculated as follows
Conversion rate = (37,000 / 50,000) x 100
Conversion rate = 74%
Net Promoter Score
Net promoter score is a subjective growth metric that tells a business how likely a consumer is to be a promoter for a brand – or if a consumer is a detractor or passive. Based on surveys, the customers are assigned a rating that tells the company how positive a consumer is about the brand. The net promoter score has the following formula:
Net promoter score = Percentage promoters – Percentage detractors
For example, say that Spotify has 90% of its consumers as promoters, while 10% as detractors. The net promoter score would then be
NPS = 90% - 10%
NPS = 80%
The growth metrics of a company not only shed light on the performance and efficiencies associated with workflows but also help the decision-makers identify problem areas and act towards fixing things. The insights that growth metrics provide into hard data are imperative today to help a company make optimal use of its resources.
Growth metrics are a way of comprehensively guaging the performance and progress of a business. There isn't just one number or formula to calculate the growth of a company, since it is always multifaceted. That being so, the 12 key growth metrics that draw a holistic picture are:
- Activation rate
- Annual returning revenue
- Monthly recurring revenue
- Average revenue per user
- Revenue churn
- Churn rate
- Customer retention rate
- Customer acquisition cost
- Customer lifetime value
- CLV: CAC ratio
- Conversion rate
- Net promoter score
Studying these growth metrics carefully tells a business how effective its strategies have been as drivers of growth.