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Understanding Startup Metrics #4 – Active Users, MoM Growth, Churn, Burn Rate

2+2=4

That’s right, numbers do not lie. People do. 😒 Numbers are essential for measuring the growth and value of startups. 💰

In the previous posts, we discussed some financial metrics related to startups. Today, we will explore other important metrics you should not miss. 🚀

Active Users🔥

There are various definitions for Active users. According to Google,

1-Day Active Users: the number of unique users who initiated sessions on your site or app on a specific date. There are also measurements for 7-day, 14-day, or 28-day active users, calculated similarly.

The meaning of “active” varies widely among different companies. Some charts do not even specify what kind of activity they measure, while others include unintentional activity—such as a high percentage of first-time users or one-time users who never return.

It is crucial to have a clear definition of “active” before reaching out to investors, competitions, or programs.

Month-on-month (MoM) growth📈

Monthly growth rates show how much your business is growing over time. 📈 But different months may have different numbers of days, holidays, or events that affect your growth. 😕

To compare your growth rates with other businesses more accurately, investors use CMGR (Compounded Monthly Growth Rate).

CMGR is the average growth rate that you would have if you grew at a steady rate every month. To measure it:

CMGR = (Latest Month/ First Month)^(1/# of Months) -1

Churn Rate📉

The churn rate is the percentage of customers who stop using your product or service over a given period of time. 🙅‍♂️

Here are different types of churn and different ways to measure it. For example, some companies look at how much revenue they lose from churn every year, but this can mix up churn with upsells. 🤷‍♀️

Investors look at churn in these ways:

Monthly unit churn: This is the percentage of customers who left you in a month. 📉 You can calculate it by dividing the number of lost customers by the total number of customers at the beginning of the month.
Retention by cohort: This is how many customers from a group (cohort) stay with you over time. 🕒 You can calculate it by dividing the number of customers who are still using your product or service by the original number of customers in the cohort.
Gross churn: This is the percentage of revenue you lose from churn in a month. You can calculate it by dividing the amount of revenue you lost by the amount of revenue you had at the beginning of the month.
Net churn: This is the percentage of revenue you lose from churn minus the revenue you gain from upsells in a month. 💰 You can calculate it by subtracting the revenue from upsells from the revenue lost and then dividing by the revenue at the beginning of the month.
The difference between gross churn and net churn is important. Gross churn shows the real loss to your business, while net churn hides the loss by adding the upsells.

Burn Rate💸

Burn rate is how fast you spend your cash. 💸 It is very important for early stage startups to keep track of their burn rate, because they can run out of money and fail if they don’t raise more funds or cut costs in time. ⏰
You can calculate your monthly burn rate with this simple formula: Monthly cash burn=Cash balance at the beginning of the year – Cash balance at the end of the year​/12

But not all burn rates are the same. You need to measure both net burn and gross burn: 🧐

Net burn: This is how much cash you really lose every month. 🔥 You can calculate it by subtracting your revenues (all the money you are sure to get) from your gross burn. Net burn=Revenues – Gross burn

Gross burn: This is how much you spend every month. 💰 You can calculate it by adding your expenses (all the money you pay) and any other cash outflows. Gross burn=Expenses + Other cash outflows

The difference between net burn and gross burn is important. Net burn shows the actual impact of churn on your business, while gross burn ignores the upsells. 😬
Investors care more about net burn than gross burn. They want to know how long you can survive with the cash you have left in the bank. 🏦 They also want to see how your revenues and expenses change over time, because your burn rate may not be constant. 📊

Bonus: Vanity Metrics🍑💨

Vanity metrics are numbers that look good on paper but don’t really tell you how your business is doing. They are easy to measure, but hard to improve. They can make you feel good, but they can also mislead you and distract you from the real goals.😓

One example of a vanity metric is downloads (or number of apps delivered by distribution deals). 📥 This metric shows how many people have installed your app, but not how many people actually use it or like it. 😐

Investors want to see engagement, ideally expressed as cohort retention on metrics that matter for your business—for example, DAU (daily active users), MAU (monthly active users), photos shared, photos viewed, and so on. 🙌

Other examples of vanity metrics are:

Social media followers: This metric shows how many people follow you on social media platforms, such as Facebook, Twitter, Instagram, etc. 🐦 But it doesn’t show how many people interact with your posts, click on your links, or buy your products. You can have millions of followers, but still have low engagement, conversion, and revenue. 😢
Page views: This metric shows how many times your website or blog has been visited. 🌐 But it doesn’t show how long people stay on your site, what they do on your site, or how they feel about your site. 😶 You can have a lot of page views, but still have high bounce rates, low retention rates, and poor user experience.
Registered users: This metric shows how many people have signed up for your service or platform. 📝 But it doesn’t show how many people actually use your service or platform, how often they use it, or how much they pay for it. 😑 You can have a lot of registered users, but still have low activation rates, high churn rates, and low revenue per user.
Vanity metrics are not useless, but they are not enough. 🤷‍♂️ They can help you track your progress, but they can also misguide you and waste your time. 🙅‍♀️ You need to focus on the metrics that really matter for your business, such as retention, revenue, and customer satisfaction. 🙆‍♂️ These are the metrics that investors care about and that will help you grow your business. 🚀

Thanks for reading, and happy entrepreneuring!

Have a nice day😊

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