Mostly Experts: Mistakes you're making with financial metrics
And bonus submissions from our readers
Financial metrics are the lifeblood of any business... But these 10 mistakes can destroy a company.
1/ Blindly copying a KPI from someone else
Not all metrics are meant for all companies. For example, if you sell to Small Businesses and plan to land and expand over time, you probably shouldn't be copying Oracle's Enterprise sales KPIs, just because it's Oracle.
And if you sell SaaS, you probably have no use quoting Gross Merchandise Value like Etsy or Airbnb.
"Data without context is a weapon of mass destruction." - @polak_jasper
I wish I could put that on a billboard somewhere.
2/ Losing Track of Revenue per Employee
As your company grows it should see operational leverage - that means the ability to do more with less. The best way to check if you are getting leverage is simply:
Revenue per head = revenue / # of employees
In particular, this metric is great for evaluating unprofitable, high-growth tech firms. You're drilling down to the core economics - you can't drill down any further.
“Most SaaS firms in the high-growth stage have a rev per employee between $250k and $350k.” - @convequity
3/ Accepting High CAC for Too Long
Customer Acquisition Cost measures how much it costs to land a net new customer.
Ideally you want to get it as low as possible by hammering efficient sales and marketing channels.
But CAC can create a money-losing flywheel that starts at acquisition. If CAC is too high, each new customer extends losses rather than growing profits. Without sufficient cash, accelerating losses aren't sustainable. To make things worse, adding more customers creates more admin costs.
“Beware of the CAC trap.” - @barrettjoneill
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4/ Really high LTV : CAC
“TOO MUCH VALUE?!” you say! Bear with me! A massive LTV to CAC ratio may actually mean you're not spending ENOUGH on S&M. It could indicate you’re actually leaving growth on the table.
Since valuation is often tied to growth, you may be restraining shareholder value. And from a competitive standpoint, you might be making life too easy for your competitors by not more aggressively chasing new customers.
“Beware of double-digit LTV to CAC!” - @heysamir_ a who writes
5/ Quoting GMV as Revenue
This one really grinds my gears...
GMV is commonly used for marketplaces (Etsy) and payment gateways (Stripe) that charge a fee or take rate. GMV is not a true reflection of a company's revenues, but rather its through-put, as most of the revenue goes to the original seller.
“Public service announcement: GMV is not Revenue!” - @immad
6/ Looking at Revenue Growth Rate without the Context of Profit Margins
Growth is great. Growth at all costs is not. Using one of these metrics without the other can lead to a skewed view of company performance. Making choices purely based on topline can lead to poor investment decisions.
“Not all growth points are equally beneficial to the company.” - @itsnivt
(And yes, I did just quote a guy who quoted me. Shameless, I know.)
7/ Pulling in users who are not up for renewal when calculating your renewal rate
It’s totally possible for customers to Renew early. Let’s say the customer doesn’t expire until December. But the Sales Team may have a compelling event to Renew the contract in October. This is great in practice, because it de-risks the future. But there are three potential drawbacks:
Sales teams may pull forward renewals just to beat their quotas in the current period - it’s like borrowing from tomorrow to pay for today. This can be a slippery slope if you get aggressive and over-mine your renewal base
This problem is further exacerbated if sales teams are not only pulling forward renewals, but also overly discounting them to hit their number
Furthermore, pull forwards overinflate your true renewal rate for the period. They can throw off false signals, as you are increasing both the numerator and denominator with a win on something that wasn’t truly up for renewal yet. Depending on the magnitude of pull forwards, this can make compares tough from period to period.
New and not up-for-renewal users have to be excluded from churn calculation. - Olga Berezovsky who writes
8/ Relying on Accrual Revenue when making growth decisions
Accrual Revenue isn't actually cash. It's a GAAP based accounting view of the world, looking at when revenue should be recognized for services delivered.
Accrual Revenue will almost always lag cash received from new business. It will lag both ARR and Billings.
“If you make hiring and spending decisions based on it, you can cap growth and leave money on the table” - @KurtisHanni
9/ Using nonstandard definitions for ARR (Annual Recurring Revenue)
Contrary to popular belief, not all "revenue" is created equal. Multi-year contracts with deep first-year discounting or volume ramps over time drive deltas between the first and last year's ARR.
Many companies will claim the larger / final / exit year Contracted ARR (CARR) as ARR. But CARR will not track to current period GAAP revenue or billings.
“Using a non-standard definition of ARR can lead to unexpected mark downs by investors during financing events.” - @lukesophinos
10/ Mismatching revenues and costs when calculating CAC Payback Period
CAC (Customer Acquisition Cost) is what you spend in S&M (sales and marketing) to land a net new customer. And CAC Payback Period is the number of months it takes to break even on that new customer.
S&M costs should be lagged by the average sales cycle of the customer segment you’re selling to. And Customer Support costs should match the current period.
“The goal is to align the dollars you spent in the past to generate the sales (ARR) you are seeing today” - @breakingsaas who writes
From our Mostly Metrics readers:
“Following Benchmarks blindly without thinking about Strategy” - Kurt C
“Not measuring metrics at all, especially relevant for smaller businesses” - Niklas W
“Not connecting the metrics to the related business process(es)” - Chris D
“Calculating LTV via Revenue without Margins” - Marmik
“Startups often assume a stable CAC while that thing can fluctuate like my butt on a groovy disco track” - Jeroen C (probably the most entertaining answer we receive)
What I’ve been reading:
Friend of the newsletter Arny turned me on to one of the most interesting (mysterious?) companies under the sun - Palantir. I originally knew nothing about this cloak and dagger big data company, founded by Peter Thiel and, until I got the scoop from an expert. Get his deep dives over at Laorca Research.
Quote I’ve been pondering:
“The Germans have a word for it: Sitzfleisch. Staying power. Winning by sticking your ass to the seat and not leaving until after it’s over”
- The Obstacle is the Way by Ryan Holiday