Consider Gross Churn Rate, Magic Number, and Gross Margin
Finding a Go-to-Market Fit (GTM) is a pivotal moment for startups. This means you’ve got a repeatable formula for finding and winning leads that can be written in the repeatable GTM playbook. But before you scale your sales and marketing, you should check the metrics to make sure you’re ready.
So, how do you know when your startup is ready to scale? I’ll help you answer this using numbers you can count on a napkin.
You have to consider three metrics – gross churn rate, the magic number and total profit. With these, you can measure the health and profitability of your business. Combining them into a simple equation, you can get your LTV: CAC The ratio (long-term customer value to customer acquisition cost), which is a measure of your business’s long-term financial outlook. If LTV:CAC is greater than 3, you are ready to scale.
Whatever your particular business, it’s worth spending some time with these metrics to find realistic goals that push LTV:CAC above 3. Otherwise, you may be in danger of running off a cliff.
Let’s unpack three basic metrics:
Gross Churn Rate (GCR) is a solution Product-Market Fit (PMF). GCR is the percentage of recurring revenue from customers who did not renew. It begs the question: Do your customers stay with you? If your customers don’t live with you, you haven’t got PMF.
GCR = Lost Monthly Recurring Revenue / Total MRR.
Examples: In early March, the company brought in $60,000 in MRR. By the end of the month, contracts worth $15,000 had not been renewed.
GCR = $15,000 / $60,000 = 0.25, or 25% GCR.