Level 1: Must-know KPIs before starting a business

Cash (in bank)

How much cash you have in your bank account.

This is money that you can spend immediately, so this does not include money that is locked for 1+ month (like certain savings accounts, bonds or stocks).

Cash burn

How much cash you are losing on a monthly basis.

Formula: cash at the end of the month – cash at the beginning of the month

Example: I started the month with $1000 in my bank account and at the end of the month I have $800 left. In this case, I have a cash burn of $800 – $1000 = -$200.

If this rate stays the same, this means I lose $200 every month and I won’t have any money in my bank account after 5 months ($1000 / $200 = 5 months).

This helps you determine how much time (= life) your business has left before it goes bankrupt without new investments.

The goal is to have a negative cash burn which means you have more cash at the end of the month compared to at the beginning of the month.

Example: Using the same situation as above, I now end the month with $1200 instead of $800. In this case, my cash burn = $1200 – $1000 = $200 

We call this a negative cash burn because NO cash is burnt and we actually GAIN cash.

Price

The amount of money you charge a customer for a certain product or service.

To decide a target price you can use two calculations.

Formula 1: profit per product + cost per product = price

Formula 2: profit + expenses = revenue

Then divide revenue by the number of customers or products you want to sell: 

revenue / number of clients or sales = price

Revenue or Sales

The total amount of money you have earned from selling your products and services in a certain timeframe (day, week, month, year).

Formula 1: number of products and services sold X average price = revenue

We use this calculation at the end of a period to know how much revenue we HAVE EARNED.

Formula 2: profit + expenses = revenue

We use this calculation to decide how much revenue we WANT to earn (to decide on our target).

Gross Profit and Net Profit

Gross profit shows us how much money we’ve earned before deducting the non-product costs (COGS, see below). 

This is the amount of money we can use in a month to pay for all the other business costs, like rent, repaying loans or marketing costs.

Net profit is the total amount of money we have earned after deducting all of our costs.

If this figure is positive, it means we have earned money.

If this figure is negative, it means we have lost money.

Formula

Gross profit = revenue – cost of goods sold

Net profit = revenue – all expenses

COGS = Cost of Goods Sold

The additional cost of selling one product or service.

These are the costs you have EVERY time you sell that product or service.

Often included costs are:

• Manufacturing costs
• Purchase price (if you’re selling products for example)
• Delivery costs
• Labour costs that have a direct connection with the sales of this 1 product or service (like salespeople, or barbers in a barbershop).

Example costs that are not included:

• Marketing costs
• Rent and utility fees
• Administrative costs
• Office supplies
• Support labour costs (like secretaries, accountants, marketing, R&D, programmers)

These are costs that do not belong to 1 product but are costs for the entire business.

Expenses

Another word for costs.

Unless specified, expenses are ALL the costs a business has in a certain time period.

You need to know this to determine if your business is profitable or unprofitable.

Profitable business = a business with a positive net profit (NOT gross profit).

Gross margin

Gross margin tells you which percentage of every product sold goes to your business before deducting other (non-COGS) expenses.

Formula: gross profit / revenue

Example:

The price of your product is $100.

The cost of goods sold is $20.

• You pay $15 to the manufacturer
• You pay $3 shipping fees
• You pay $2 for your sales personnel

In this case your gross margin = ($100 – $20) / $100 = 0.8 = 80%

As a business you should aim for AT LEAST 80% gross margin.

Some products or services can have a lower gross margin, but your average gross margin should be higher than 80%.

Anything below that figure makes it difficult to grow the business and stay profitable.

Net margin

Net margin tells you which percentage of every product sold goes to your business after all expenses have been deducted.

Formula: net profit / revenue

Break-even point 

This is the point where revenue = expenses.

Said differently: revenue – expenses = 0

So if you have $5000 in monthly expenses, you need $5000 in revenue that month to be break-even.

If you earn more revenue than your break-even point, you will be profitable.

If you earn less revenue than your break-even point, you will be unprofitable and make a loss.

FAQ

Question: How to determine the price of a product or service?

Answer: 

Most people look at competitors to see what their price is and pick the same price or something slightly lower. That doesn’t make any sense because your expenses are going to be different from your competitors’.

Instead, you should decide based on your expenses and the profit you want.

Formula: profit + expenses = target revenue.

Price = revenue / number of products or services sold

To stay in business it’s important to know your expenses and your desired gross and net margin.

Instead of looking at your competitors, focus on your own business, clients and products and services.

You can charge any price if the value you offer is high enough and there is a demand for that value.

————–

Question: Difference between value and price?

Answer: 

Most business owners think that price is the most important factor for a customer. It’s not.

Customers make decisions based on the perceived value of the product or service they want to purchase.

Example: 

• People buy an iPhone for $1000 even though they can get the same phone from OnePlus for $500.
• People buy a Prada bag for $2000 even though they can get the same kind of bag for $20 without the Prada logo.
• People buy anything new for 100% of the price, but only want to spend <50% of the price when it’s second-hand….even if it has not been used.

You can charge any price IF

• The perceived value of a customer is higher. They think it’s worth more than the price.
• There is a demand for that product or service at that price level. You can offer the greatest product or service, but if there are no people who CAN spend that amount of money and who WANT to spend that amount of money for that solution, you won’t sell anything….no matter how good it is.

That’s why a business owner needs to focus on:

• A market that has a problem, has the money to spend and wants to solve this problem
• Your own product and service and increasing the perceived value as much as possible, so you can increase your price.

How to increase the perceived value:

• Know the customer’s needs and their dream outcome. What do they want?
• Increase the likelihood of accomplishing that dream outcome. It’s not if you can do it, but you have to make the customer BELIEVE that you can do it.
• Reduce the time it takes to achieve that dream outcome. Customers are always willing to spend for faster solutions.
• Reduce the amount of effort or sacrifice it takes for the customer to reach the dream outcome. People are lazy. The less they have to do, the higher they value the solution.

Level 2: Must-know KPIs to become profitable

Number of clients

The number of unique customers you have.

If a person buys two products, this means:

• 2 purchases
• 1 client

While it’s important to know how many products or services you have sold, it’s more important to know how many clients you have.

The clients are the ones that purchase something and the ones you can provide value to.

If you don’t have a way to count and identify the number of clients, it becomes difficult to grow or become profitable.

It’s not impossible, but it becomes more difficult.

Number of new clients or new sales

The number of new clients (or new sales) you get in a month (or period).

You can calculate this on a daily, weekly or annual basis too, but we look at most KPIs on a monthly basis, that’s why we wrote: “in a month”.

Day, week, month, year…it’s all fine as long as your periods are the same for all other KPIs.

You can calculate this in 2 ways:

• Per customer. This means knowing how many new customers you get in a period.
• Revenue or sales. This means knowing how much new revenue you get in a period.

Formula 1: New customers in a period = customers at the end of the period + customers lost during the period – customers at the start of the period

Formula 2: New sales in a period = sales at the end of the period + sales lost during the period – sales at the start of the period

Example:

1 customer is worth $100 in a month.

At the start of January, there were 10 customers, for a total of 10 X $100 = $1000 in revenue.

At the end of January, there were 15 customers, for a total of 15 X $100 = $1500 in revenue.

During the month, 2 customers left, meaning we lost 2 X $100 = $200 in revenue.

New customers = 15 – (10 – 2) = 7 new customers in a month

New sales = $1500 – ($1000 – $200) = $700 in new sales in a month

AOV = Average Order Value

The average revenue per order (not per customer!).

This is an important metric for e-commerce or product-selling businesses, but not so important for service businesses.

This helps you decide if you should increase the value per order or focus on something else in the business if you want to grow your revenue and profits.

Example:

5 customers place 8 orders with a total revenue of $800.

AOV = $800 / 8 = $100 per order

Revenue per customer* = $800 / 5 = $160 per customer

*this is also called ARPU or Average Revenue Per User

ARPU = Average Revenue Per User

The average revenue per customer.

Formula: ARPU = total revenue / total number of customers

CAC = Customer Acquisition Cost

The costs of acquiring one extra customer.

This is a combination of your sales costs and marketing costs, divided by the number of customers you acquired with these costs.

When you know both your CAC and your CLV (see below) you’ll know if you’re earning money or losing money with each new customer you acquire.

Formula: CAC = (sales costs + marketing costs) / new customers

Example:

You spend $100 per month on Facebook Ads (marketing costs).

You spend $900 per month on salary for your sales and marketing staff.

You spend $200 per month on external marketing support (e.g. SEO optimization, funnel builders).

With these marketing and sales efforts you acquire 100 customers per month.

Your CAC = ($100 + $900 + $200) / 100 = $12 per customer

This means that it costs you $12 to acquire one new customer.

Churn

The percentage of customers you lose every month. 

This is a useful figure for two reasons:

1. It helps you know your maximum potential revenue or profit for your current way of doing business.
2. It lets you know which area of the business you should focus on if you want to grow. If churn is very high (this is bad), you can quickly improve your business by focusing on existing customers and improving your retention rate. On the other hand, if your churn is very low (this is good), it means you have many loyal customers who stay with you and it’s better to focus your efforts elsewhere, such as improving the CLV (see below) or number of new clients.

The lower your churn, the better.

Formula: Churn = (number of customers lost in a period / number of total customers at the start of the period) X 100%

Example:

At the start of the month you have 500 clients.

During the month you lose 50 clients.

Your churn = (50 / 500) X 100% = 10%

This means every month you lose 10% of your existing customers.

You can calculate churn per day, week or year too, but you have to make sure all figures in the formula are based on the same timeframe.

LTV = Lifetime Value

The total revenue you will earn from 1 customer ever.

There are many ways to increase the LTV, which we will discuss later.

This is one of the most important KPIs for your business.

If you know this figure, you also know how much you can spend on marketing, advertising or sales to get a new customer (CAC).

If your LTV is lower than what you spend to get a customer (your CAC), you are basically losing money with every new customer.

On the other hand, if your LTV is higher than what you spend to get the customer (CAC), you are earning money with every new customer.

Formula: LTV = Average Revenue Per User / Churn

Example:

You have 100 customers at the start of the month.

You gain 5 new customers and you lose 5 customers during the month.

Your total revenue for the month was $10,000

Your LTV = 

(Revenue / customers) / (lost customers / customers at the start of the month) = 

($10,000 / 100) / (5 / 100) = 

$100 / 0.05 = 

$2,000

If instead you gain 10 new customers and lose 10 customers, your LTV is:

($10,000 / 100) / (10 / 100) = 

$100 / 0.1 =

$1,000

You can see how increasing the churn from 5% to 10% reduces your LTV by 50% ($2,000 to $1,000).

This shows the importance in not just increasing the number of customers or the revenue per customer, but also your churn rate and how many customers you retain.

No matter how many customers you attract, if your churn rate is high, you’re wasting your money on sales and marketing.

Without knowing LTV it’s nearly impossible to know how much you can spend on marketing, advertising and sales (CAC).

Keep in mind that LTV is the total revenue you will earn from one customer during the customer’s relationship with your business.

If you want to know the LTV in gross profit you will have to multiply the LTV by your Gross Margin.

Doing this gives you an even better picture of how much you can spend on CAC.

CLV = Customer Lifetime Value

This is the same as LTV, just a different name.

Some companies differentiate CLV in these ways:

1. CLV = LTV X Gross Margin.

In other words, it’s your LTV in gross profit terms.

2. LTV = total revenue / churn rate, while CLV = revenue per user / churn rate

In this case LTV shows you the lifetime revenue of all customers, while CLV shows you the lifetime revenue per customer.

While some companies like to differentiate CLV and LTV this way, generally speaking CLV and LTV are the same thing and that’s how we treat them too.

Special formula: Hypothetical Max

For a business with returning customers (= most businesses) you can calculate your hypothetical or potential maximum for your current business if you know:

• Number of customers (at the start of the period)
• New number of customers (during the period)
• Number of customers lost (during the period)
• Revenue (during the period)
• Price
• Optional: Gross Profit… in case you want to calculate everything based on gross profit instead of revenue.

With these, you can calculate:

• Churn rate
• LTV

You can then calculate your hypothetical max.

This is the maximum amount of revenue you can earn as a business in a period.

To calculate this you multiply your number of customers by your LTV.

Formula: hypothetical max = number of new customers X LTV

What does this mean?

If you continue doing your business the way you are doing it now, you will never increase your revenue more than your hypothetical max.

How can you increase your hypothetical max?

1. Increase the number of new customers in a period
2. Increase the average revenue per user
3. Reduce the churn rate

As mentioned earlier, most people focus on increasing new customers.

This is fine, but this is only one way to improve your business.

It makes more sense to figure out which of the three metrics above is your weakest one and focus on that.

The weaker it is, the easier it is to improve.

Example:

Current number of customers = 380

New customers = 100

Customers lost = 50

Current revenue = $380,000

Current price or ARPU = $1000

Calculate:

Churn = (50 / 380) X 100% = 13%

LTV = $1000 / 0.13 = $7700

Hypothetical max = 100 X $7700 = $770,000

If you keep doing business like you are doing now, you will continue to grow until you reach $770,000 (in a period), but you will never earn more revenue than that.

To grow your business (= increase revenue), you can,

• Increase number of new customers: 1000 instead of 100
• Increase price or ARPU: $1500 instead of $1000
• Reduce churn: 3% instead of 13%

You can calculate the hypothetical max for your own business and change one of the three metrics to see which one gives you the biggest improvement.

In the case of our example, it might be easier to reduce churn than it is to increase the number of new customers.

If we reduce our churn to 3%, our new hypothetical max would be:

100 X ($1000 / 0.03) = $3,333,333

Of course, to make the best decision we have to know how much it costs to make any of these improvements, but as you can see you always have different options to improve your business.

Focus on one before working on a second one.

FAQ

Question: What is the difference between revenue, price and LTV?

Answer: 

Price is what one customer pays to you at one time.

Revenue is the total amount of what all customers have paid you.

LTV is what one customer pays to you during his entire relationship with your business.

If a customer only purchases from you one time, the price and LTV will be the same.

But if a customer on average purchases from you three times or stays with you for three months, the LTV will be 3 X average price.

————–

Question: What is the difference between CAC and COGS?

Answer: 

Cost of Goods Sold (COGS) is the amount of money it costs you to manufacture or deliver one product or service.

Customer Acquisition Cost (CAC) is the amount of money it costs you to acquire a new customer.

If it costs you $10 to get a new customer (CAC) and it costs you $5 to manufacture or deliver your service (COGS), you will spend $10 once to get customer A, but you will spend $5 every time you sell your product or service to customer A.

————–

Question: How to increase my revenue?

Answer: 

1. Get more customers
2. Increase the average revenue per customer
   1. Increase the average price of each purchase
   2. Increase the number of times a customer buys (example: reducing churn rate)

————–

Question: How to increase my profitability?

Answer:

By removing your constraints.

To do that, you calculate your hypothetical max and see which part of the equation is your weakest link:

• Number of new customers
• ARPU
• Churn rate

And we will add one more since we’re talking about profitability:

• Gross Margin

Again, look at which of these is your weakest link and focus on improving that one first.

Remember: you cannot exceed your hypothetical max unless you improve your business.

Level 3: Must-know KPIs to grow a business

Retention rate

The percentage of customers that stay with you for more than one period (day, week, month, year).

This only applies to businesses where customers can purchase more than once (i.e. recurring business).

It’s the opposite of churn rate.

Formula: retention rate = (customers at the end of a period – number of new customers during period) / customers at the start of a period

Referral rate

The percentage of new customers that was referred to you by an existing customer.

A higher number is usually better, because it means your existing customers are so satisfied with your business that they are telling others about it and referring them.

This kind of word-of-mouth is the best and often cheapest marketing there is.

Formula: referral rate = number of new customers through referral / number of total customers 

ROI = Return On Investment

A very popular metric to show how profitable an investment is.

By using this metric, you can easily compare different investment opportunities.

Formula: ROI = (net profit / cost of investment) X 100%

One thing to keep in mind with ROI is that it doesn’t take into account differences in time, so you’ll have to further calculate that to accurately compare different investment opportunities.

Example:

At a barber shop you added two services in the last two years.

In 2019 you added shaving men’s facial hair to your menu.

The total costs for adding this new service was around $12,000 (licenses, training, equipment, etc.)

Since then (= past 2 years) you have earned $20,000 in net profit.

In 2020 you added perms for women to your menu.

The total costs for adding this new service was around $15,000 (licenses, training, equipment, etc).

Since then (= past year) you have earned $20,000 in net profit.

Which one has the higher ROI?

Shaving ROI: ($20,000 / $12,000) X 100% = 167%

Perms ROI: ($20,000 / $15,000) X 100% = 133%

So, at first glance it seems like adding shaving to the menu first was the best option.

But remember: the net profit for shaving was earned over 2 years, while for perms it was earned over 1 year!

The annualized shaving ROI (= ROI per year) = 167% / 2 = 83.5%

As you can see, perms has been a more profitable addition to the menu than shaving.

While it’s easy to calculate ROI after you have invested in a new project, you can also calculate it before investing in that project.

Sometimes you have to make an educated guess for your potential net profit based on what others have earned, but there are ways to sell your new product or service before investing in something new. 

It’s beyond the scope of this ebook, but just know that you can use ROI both before and after an investment.

Startup capital

The money used to start a business until it turns a profit.

It covers all the expenses necessary for getting a new company up and running, such as:

• Rent
• Paying bills or utilities
• Buying equipment and supplies
• Paying employees
• Stocking inventory

This figure is often used in combination with ROI and Break-Even Point to decide how much money is needed to start a business and how long it will take for it to become profitable (and have your initial investment back).

The lower this number, the less financial risk you run if your business fails.

At the same time, the lower this number, the less time you have to make the business profitable, generally speaking.

NPS = Net Promoter Score

The likelihood for a customer to recommend your product or service.

A high NPS score means you have many customers willing to recommend your business to someone else, which also means you have many satisfied customers.

People only recommend when they are satisfied themselves.

Because of this, NPS is a much better metric than “satisfaction rate”.

To calculate this metric, you ask customers:

“How likely is it that you would recommend [Organisation X/Product Y/Service Z] to a friend or colleague?”

Customers pick a number between 0 (not at all likely) and 10 (extremely likely).

Based on their score, customers fall into three categories:

• Promoters: scores 9 & 10
• Passives: scores 7 & 8
• Detractors: score 0 to 6

Formula: NPS = % of promoters – % of detractors

We ignore the % of passives.

Example:

Promoters = 50% of respondents

Passives = 40% of respondents

Detractors = 10% of respondents

NPS = promoters – detractors = 50 – 10 = 40

The higher the NPS score, the better.

It’s a useful metric to know how your customers feel about your product, service or business, but it’s only a tool to use so don’t focus on it too much.

Other metrics mentioned earlier are much more important than this.

Special formula – Golden Ratio

We’ve taken this formula from Alex Hormozi and it basically means that your referral rate is higher than your churn rate.

Why is this a good thing?
When your referral rate is higher than your churn rate, more new customers join every month via referral than the total number of customers leave every month.

This is before including new customers you get from advertising or other sales and marketing activities.

As long as your referral rate is higher than your churn rate, you will continue to grow infinitely…without spending extra on sales or marketing, simply because your business is so good that your customers refer it to others.

Formula: Golden ration = referral % > churn %

Example:

Every month 7% of your new customers come via referral.

Every month you lose 4% of your customers.

In this case: 7% > 4% which means you have a golden ratio and you will continue to get new customers faster than that you lose customers and because of that you can grow infinitely (as long as referral rate > churn rate).

Special formula – Client-Financed Acquisition

Another formula taken from Alex Hormozi.

When each new customer basically pays for another new customer because you get so much more cash from a new customer than it costs to acquire and sell to them.

This way you don’t have to invest any money because the customers pay for every new customer, making this business very low-risk.

Formula: Client-financed acquisition = 2x (CAC + COGS) < 30-day cash

Example:

You sell an online course for $2500.

Your costs to acquire a customer and sell him/her the course are:

• CAC = $1000
• COGS = $100

In this case, every new customer costs you $1100, but will pay you $2500.

As a result, every sale gives you $2500 – $1100 = $1400 in extra cash….which is more than the $1100 it costs to acquire a new customer.

This way you can use the money a customer pays you to acquire a new customer, without ever needing to invest extra money.

But what if CAC = $2000?

In this case, your total cost for a new customer = $2000 + $100 = $2100.

It’s still profitable to acquire a new customer: $2500 – $2100 = $400, but you don’t earn enough cash to pay for a new customer.

What do you do when that happens?

Two options:

• Wait until you get more cash from existing/new customers.
• Get an investment or loan to invest right now.

FAQ

Question: Which metrics should I focus on when running my business?

Answer: 

The minimum you’ll have to know are:

• Cash (in bank)
• Cash burn
• Revenue
• Gross profit
• Net profit
• LTV
• Churn
• New customers / sales

Optional but recommended: 

• CAC
• Break-even point

With these you will know the performance, strengths and weaknesses of your business and how much time you have left before you go bankrupt (in case you’re unprofitable).

This way you know what to focus on and can make decisions to improve your business.

In case you want to attract outside investments, particularly from Venture Capitalists, you’ll also want to know:

• Growth
  • In revenue
  • In net profit
• Stickiness
  • Retention rate (monthly and annually)
• Profitability
  • Gross and Net Margin
  • Gross and Net Profit

————–

Question: What is the downside of these KPIs?

Answer:

Most KPIs show you the efficiency of your business but don’t say much about the effectiveness of your business.

This means that they give you a good idea of how well you’re running your business and using your resources, but you don’t know how well you’re solving your customer’s problem, if there is a better way to do it and which improvement is the best one you can make in your business.

These are very hard to measure.

What’s important to remember is that running a business is a combination of knowing your KPIs (quantitative) and knowing your customers (and their needs; qualitative).

————–

Question: What about satisfaction rate?

Answer:

A very popular KPI among businesses, but honestly it’s a very weak metric.

What exactly does it mean if customers are “satisfied”?

What do you do if they are “unsatisfied”?

Based on your sales and churn rate, you will already know if customers are unsatisfied because they won’t come back so these two metrics will be very weak.

On the other hand, you will know your customers are satisfied if they keep coming back and these two metrics are strong.

NPS is much more useful because it helps you distinguish “satisfied” customer (= passives) from “excited” customers or “fans” (= promoters).

At least with NPS you can know that your customers are not complaining, but they are not so excited about your business that they will recommend it.

This is a huge difference because it’s very unlikely for promoters or “fans” to switch to a competitor, while passives can easily move on to someone else.

As a result, you know that you have more work to do to build relationships and increase the value you offer.

Glossary of terms

Average Order Value (AOV)

The average revenue per order (not per customer!). 

Important for businesses selling products.

Average Revenue Per User (ARPU)

The average revenue per customer.

Break-even point

This is the point where revenue = expenses.

Said differently: revenue – expenses = 0

Cash

How much cash you have in your bank account.

Cash burn

How much cash you are losing on a monthly basis.

Churn

The percentage of customers you lose every month. 

Client-Financed Acquisition

When each new customer basically pays for another new customer because you get so much more cash from a new customer than it costs to acquire and sell to them.

Cost of goods sold (COGS)

The additional cost of selling one product or service.

Customer Acquisition Cost (CAC)

The costs of acquiring one extra customer.

Customer Lifetime Value (CLV)

Synonym for Lifetime Value (LTV).

Expenses

Another word for costs. Unless specified, expenses are ALL the costs a business has in a certain time period.

Golden ratio

When your referral rate is higher than your churn rate and you can grow infinitely.

This means you get more new customers from referrals than the number of customers you lose in the same period.

Gross margin

Which percentage of every product sold goes to your business before deducting other (non-COGS) expenses.

Gross profit

How much money we’ve earned before deducting the non-product costs (COGS, see below).

Hypothetical Max

The maximum amount of revenue (or number of customers) you can earn as a business in a period.

Lifetime Value (LTV)

The total revenue you will earn from 1 customer ever. 

Net margin

Which percentage of every product sold goes to your business after all expenses have been deducted.

Net profit

The total amount of money we have earned after deducting all of our costs.

Net Promoter Score (NPS)

The likelihood for a customer to recommend your product or service.

Number of clients

The number of unique customers you have.

Number of new clients

The number of new clients (or new sales) you get in a month (or period).

Price

The amount of money you charge a customer for a certain product or service.

Referral rate

The percentage of new customers that was referred to you by an existing customer.

Retention rate

The percentage of customers that stay with you for more than one period (day, week, month, year).

The opposite of Churn.

Return on Investment (ROI)

A popular metric to show how profitable an investment is.

Revenue

The total amount of money you have earned from selling your products and services in a certain timeframe (day, week, month, year).

Sales

Synonym for Revenue.

Startup Capital

The money used to start a business until it turns a profit.

It covers all the expenses necessary for getting a new company up and running.

Formulas

Average Order Value (AOV)

Total revenue / number of orders

Average Revenue Per User (ARPU)

Total revenue / number of customers

Break-even point

Revenue – expenses = 0

Cash burn

Cash at the end of the month – cash at the beginning of the month

Churn

(Number of customers lost in a period / number of total customers at the start of the period) X 100%

Client-Financed Acquisition

2x (CAC + COGS) < 30-day cash

Customer Acquisition Cost (CAC)

(Sales costs + marketing costs) / new customers

Customer Lifetime Value (CLV)

See Lifetime Value (LTV).

Golden ratio

Referral rate > churn rate

Gross margin

Gross profit / revenue

Gross profit

Gross profit = revenue – cost of goods sold

Hypothetical Max

Number of new customers X LTV

Lifetime Value (LTV)

The total revenue you will earn from 1 customer ever. 

Net margin

Net profit / revenue

Net profit

Net profit = revenue – all expenses

Net Promoter Score (NPS)

% of promoters – % of detractors

Referral rate

Number of new customers through referral / number of total customers 

Retention rate

(Customers at the end of a period – number of new customers during period) / customers at the start of a period

Return on Investment (ROI)

Net profit / investment

Revenue

1. Earned revenue = number of products and services sold X average price
2. Target revenue = profit + expenses

Bonus – KPI Calculator (free spreadsheet)

I’ve created a free bonus spreadsheet that covers all the mentioned KPIs and makes it easy for you to calculate them for your business.

You can find the calculator here: https://docs.google.com/spreadsheets/d/16I925ww-eWG4sI0iTqMMfh9ey2rV5UIClxYfGKvYUmg/edit?usp=sharing

A video explanation can be found here: https://youtu.be/11nK9Dh23fM

I continue to update the calculator to make it better and easier to use so the video explanation may be showing an older version of the spreadsheet.

The next step: where to go from here

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I don’t have it all figured out but I learn, self-experiment and do my best to walk the slow march toward greatness with you.

Jim Bouman