What are actionable metrics?
Actionable metrics are indicators that tell you which area of your business is performing well or not. There are two types of indicators:
- Lagging indicators - They tell you what has already happened. For example, gross margin, churn, EBITDA, etc.
- Leading indicators - They look forward to future events. For example, website traffic, sales funnel conversion rate, sales headcount, and so on.
Many companies tend to look at their lagging indicators only. Or worse still, look at their metrics in isolation. I cannot stress enough why you should never look at metrics in isolation.
For example, when you’re analyzing Customer Acquisition Costs (CAC), you need to compare it to your Customer Lifetime Value (LTV) and CAC payback time to get a complete picture.
Now, let’s say you’re analyzing EBITDA as an isolated metric. A negative EBITDA would indicate that you’re not profitable at all. If your investors are also analyzing EBITDA as an isolated metric, then a negative EBITDA means you’re doomed.
But, is that really the case? No. Here’s why:
You need to rely on a set of metrics for an accurate picture. If your revenue is quadrupling, your LTV to CAC ratio is healthy, and you have cash in the bank, it means that your business is growing fast. Therefore, it’s completely fine to have a negative EBITDA – your growth rate indicates that the profit will come later.
Here are some of the actionable metrics that you should be tracking:
- Monthly Recurring Revenue (MRR) - An MRR is the lifeline of SaaS and subscription-based businesses. If your company has a solid product, your customers will automatically return every single month through a subscription. Revenue is one of the few metrics that can be viewed as a stand-alone metric. Revenue growth is always a good thing.
- Net Revenue Retention (NRR) - NRR rate reflects the success of your customer retention. A high net revenue retention rate means that you can expand your revenue through upselling and cross-selling.
- Customer Acquisition Costs (CAC) - Your CAC tells you how much it costs to acquire a customer.
- Customer Lifetime Value (LTV) - Your Customer Lifetime Value (LTV) is the total amount a customer is worth during their lifetime with your business. It gives you an idea of how much repeat business you can expect from a customer and how much you can spend on acquiring and retaining them.
- LTV: CAC - The LTV to CAC ratio measures the relationship between the lifetime value of the customer and the costs of acquiring them. It’s a good indication of when to invest in scaling.
- CAC payback time - CAC payback time tells you how long it takes for you to break even from your CAC.
- Churn - Churn is an actionable metric that helps you turn failure into success. When paired with other metrics, you’ll gain insights on growing your business.
- Gross margin - Gross margin is the amount left after deducting the Cost of Sales from the total revenue. It’s one of the critical indicators of how profitable and scalable your business is.
- Cost of Sales (COS) - COS refers to the direct costs associated with selling and delivering your product. Your goal is to grow your revenue faster than your COS.
- EBITDA - EBITDA stands for Earnings Before Interest, Tax, Depreciation, and Amortization. It’s a metric that measures a company’s overall financial performance.
- Net profit - Your net profit is whatever you’ve earned or lost after deducting all expenses from your total revenue.
- Operational Expenses (OpEx) - Your OpEx is broken down into three main categories that have a direct impact on your revenue growth. It helps you allocate your resources properly.
The great thing about data is being able to make informed business decisions, and justify them to your stakeholders. It’s also to make sure you don’t run out of money too soon. But it’s important to know what metric is worth paying attention to and what’s fluff.
At the risk of sounding like a broken record, let me just say it one last time (for now): Never look at any metrics in isolation.