So, one notional startup which can be called, for instanse, "AI planning" with a subscription business model needed to optimise sales.
Startup description: AI planning project specializes in machine learning and provides services to other companies to work with their databases.
Business model: SaaS (Software as a Service). There are three packages depending on the number of options. Let's call them package 1 (for $20 per month), package 2 (for $50 per month) and package 3 (for $150 per month).
Startup's main request:
1) Identify priority KPIs for its development to optimise the development process and reach the first investment to scale the product.
2) Identify the reasons why the startup was losing money by the end of the first quarter and propose an optimization model.
To analyse processes in the startup, we asked the founders to enter data from June 2021 to May 2022 into the Startup KPIs calculator in two categories:
1) the number of users added and left for each month during this period;
2) The amount of money you spent on user acquisition and retention for each month in that period.
Table 1. Attracted users by each package. (Sections where data needs to be entered are highlighted in blue; sections where the calculator does the calculation are highlighted in green and other colours).
In June 2021, the startup began attracting its first users. By the end of the first month 100 subscribers for package 1, 10 subscribers for package 2 and 10 subscribers for package 3 had arrived, bringing the startup $3,700 that month. So, $3,700 is the New MRR (Monthly Recurring Revenue).
By the end of July 2021, the startup had attracted: 120 subscribers for package 1, 25 subscribers for package 2, 3 subscribers for package 3. New subscriptions brought in $4,100 this month (New MRR). At the same time, the user churn was: 5 subscribers on package 1, 2 subscribers on package 2, 3 subscribers on package 3. The churn was $650 (Churned MRR). Total MRR for August was $7150, taking into account existing users, new users and churn.
Looking at the numbers over time, we see a problem with the number of retained users on package 3 compared to the number added. So, starting from January, Retention Rate Customer is expressed by a negative coefficient and in February already reaches 300%.
Picture 1. Retention rate for each package
At Package 1 and 2 level we see stagnation and no growth from June to October 2021. This affects the Net New MRR figure, which reflects the amount of money a startup receives from new users in a particular month. As we can see from Table 2, the Net New MRR figure is quite low, and this prevents the startup from taking a large market share. Thus, as of June 2021-February 2022, the startup is not of interest to investors given its weak user retention (which in the long run may have caused the loss of most users).
So, the startup faced the following problems:
Weak unit economics (cost/revenue model in the business model per unit of product sales)
The startup fails to retain the users of the third service package as much as possible.
The number of new users in general is not increasing at the expected rate.
Table 2. Detailed analysis of MRR
According to the Startup Genome report, 70% of startups misjudge their growth stage and try to scale prematurely, which ultimately leads to startup ruin. Analyzing the "health" of a startup with Startup KPIs will not only present the project in a better light for investors, but also help avoid catastrophic risks for the company. The calculator will itself calculate which parameters should be improved at each stage of the startup's development.
Using the calculator, the startup was able to identify that package 3 does not meet the expectations of the users, and they abandon it. To understand how cost-effective it is to retain this package at all, we conducted a Customer lifetime value analysis and determined the amount of money (see Table 3) that is spent on user retention. Based on the findings from this data, the startup implemented automation of the customer support process, which increased costs but helped retain users.
According to Harvard Business School, it costs 5-7 times more to acquire new customers than to retain existing ones. Increasing customer retention by 5% can increase profits by 25-95%. Selling to an existing customer is 60-70% successful, while selling to a new customer is 5-20% successful.
Table 3: Costs of attracting and retaining users and LTV
The expansion of the sales team helped increase Net New MRR from February to March by 104% and then steadily maintain a New MRR of $34,000 (see Chart 2).
Graph 2. Growth in revenue from new users
As a result, these solutions helped to create a balanced startup development strategy according to the money spent on attracting new users, and at the same time to achieve 0.31% average Burn rate (see Diagram 3).
Graph 3. The rate of spending on attracting users
The startup has now embarked on a refreshed strategy with a focus on user retention. With this strategy, AI planning showed a good LTV to CAC ratio of 2.62 at the end of the analyst period. In effectively growing start-ups, its value is above 2.5-3 based on the industry. (see Table 4).
Table 4: Key indicators of startup development
Based on the results of the StartupKPIs platform the funder receives a Rating Benchmarking Board - a report on key metrics for the year with evaluated key metrics by industry taking into account the business model. Under the new customer retention-focused strategy, revenue churn for the year was 3%, Burn multiple was 0.31 and margin was 76% (Gross Margin), reflecting positive momentum for further scaling.
The Startup KPIs calculator reflects the following key metrics:
ARR (annual recurring revenue) is a measure of revenue elements that are recurring in nature. It should exclude one-off income.
MRR – regular recurring monthly income.
New MRR – regular monthly income from new clients.
Net New MRR – the sum of income from new clients and from existing clients minus the outflow of income from clients who left.
Churned MRR – MRR lost due to customers not renewing their subscriptions.
MRR Churn Rate – MRR churn rate. It is fixed if the clients don't renew the subscription or they switch to a cheaper fare.
MRR Growth Rate – the percentage increase in revenue from month to month, which answers the key question of how fast a startup is growing.
Revenue Churn Rate – a measure of customer churn.
Retention Rate (Customer) – a measure of customer retention.
Retention Rate (Revenue) – a measure of revenue retention.
Burn Multiple – the ratio of money spent on revenue growth (Net New MRR): the higher it is, the more money the startup is spending to achieve each unit of growth, respectively, the lower it is, the better it is.
LTV (lifetime value) – the profit that one customer makes during the whole time you work with the company.
CAC (customer acquisition cost) – cost of customer acquisition. It is calculated as the sum of all marketing and sales costs divided by the number of new users.
LTV: CAC (Ratio of Lifetime Value to Customer Acquisition Cost) – ratio of customer lifecycle value to customer acquisition cost.
Gross margin is the result of subtracting the value of goods sold from net sales. Gross margin can also be expressed as a percentage and is used when comparing startups of different sizes and in different industries.