Saturday, August 6, 2016

A guide to start-up metrics

Entrepreneurs and investors have used a variety of metrics to measure the performance and the worth of consumer internet companies. Photo: iStock images

Mumbai/Bengaluru: In the go-go years of 2014-15, it was gross merchandise value (GMV); now, it’s unit economics. Entrepreneurs and investors have used a variety of metrics to measure the performance and the worth of consumer internet companies.
Mint takes a look at some of the frequently used terminologies that have shaped the narrative on home-grown start-ups.
Gross merchandise value
Gross merchandise value or GMV was the favourite metric of e-commerce companies used to highlight their explosive growth. GMV essentially signifies the value of goods sold on an online marketplace, but does not take into account factors such as product returns and discounts, the nemesis of unit economics (explained next). Consequently, it does not present a reliable picture of the company’s health. Online marketplaces charge sellers a commission on the products sold, which account for the revenue. For instance, a high-end phone will significantly add to the company’s GMV, but not much to its revenue as commission on phones could be anywhere between 3% and 10%. So an iPhone with a GMV of Rs.50,000 could get revenue of between Rs.1,500 toRs.5,000, or even lower, if there are discounts and none of the phones are returned.
Unit economics
Start-ups are increasingly focusing on achieving unit economics after investors clawed back on investments starting late last year. A business model is considered apt if it is unit economics positive, in other words, if revenues generated from the sale of a product are more than the direct cost associated with selling the product.
Transacting users
Transacting users or active users are those who actually buy products or services on a platform at some sort of defined frequency. A user who transacts at least once a month represents a transacting user. Though it is not a comprehensive metric in itself, the number of transacting users is nevertheless important as it gives a sense of the potential size of the overall market.
Repeat users
Repeat users are consumers who transact more than once or make repeat purchases on a platform within a given time frame. Again, the frequency and time frame depends on the company in question. Tracking repeat users is important because it is a proxy for customer loyalty. There is a thin line between an active user and a repeat user. For instance, a newly acquired customer will be considered an active user, and to become a repeat user, the customer will have to transact again within a given time frame.
Customer acquisition cost
This refers to the expenses incurred by the company for acquiring a customer, primarily discounts and advertising. Customer acquisition cost or CAC can be derived by dividing total money spent to acquire a customer, divided by the total number of customers acquired within a given time frame. For an e-commerce company, the lower the customer acquisition cost, the better. But in a hyper-competitive market like India, start-ups have had high CAC.
Lifetime value of customer
Lifetime value (LTV) of a customer reflects on the business a company can generate from a consumer during its relationship with the consumer or before the consumer veers to a rival business. The companies internally decide upon a pre-determined longer time frame to calculate lifetime value. LTV is expected to be bigger than CAC to make the business sustainable.
Cash flow positive
While consumer Internet start-ups need to burn cash initially to achieve growth, positive cash flow is the latest metric these companies are aiming for. It essentially implies that outflow of cash is less than inflow of cash. In other words, these start-ups pay for operational costs of the business with revenue generated from sales, rather than using external funding.
Burn rate
Burn rate signifies cash spent by companies within a given time frame. So if a company claims to have a monthly burn rate of $1 million (Rs.6.67 crore), it means that the company is spending $1 million every month.
Source - livemint

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