Entrepreneur

5 metrics every software CEO should obsess over

Editor’s note: Clate Mask is co-author of the New York Times bestseller Conquer the Chaos and CEO of Infusionsoft,. He submitted this column to VentureBeat.)

There’s an old business maxim that goes “Where performance is measured, performance improves.  Where performance is measured and reported, performance improves dramatically.” And pretty much every manager has observed the truth in it.Humans, though, can only focus on so many things at once.  So, measuring the right things is the key to effectiveness.

When you’re running a software company, there are seemingly hundreds of things to measure. It can be difficult to identify and keep your eye on what really matters.  Over the years, and through the various stages of our growth, I’ve found the things we measure at Infusionsoft change as our business matures and evolves.  Of course, we’re always measuring revenue, profit and cash, but other things are less obvious and can easily get lost in the mix.

Here are five important metrics I believe every software CEO should focus on, regardless of their business stage.

Cost per acquisition - CPA is measured in various ways, but the best way is to roll up all sales and marketing costs for the month and divide by the number of customers acquired that month.  If your sales cycle is 6 months, then use the sales and marketing expense from six months ago as the numerator and use this month’s unit sales as the denominator.  Whatever model you have, pick a mathematical method and stick to it so you have stable comparative data.  When you know CPA, you can make sound decisions about whether and how to invest to acquire more customers.

Revenue per employee – Early-stage companies typically have very low revenue/employee.  Once you get to about $200k per employee, you’ve generally got a pretty exciting business.

We measure revenue per employee on a monthly basis, dividing total revenue by the number of employees and then multiplying by 12 months to get an annualized number.  Tracking this figure each month has enabled us to make sound hiring decisions, manage our expenses, and be accountable to the labor investments we make.

Note: It is important to recognize that a software company’s primary investment mechanism is in human capital.  Therefore, the revenue per employee number should be used wisely, depending on the stage of the business.  For example, if you manage an early-stage software company to a $200k+ revenue per employee figure, you’ll never grow the company.  I have found that it is wise to chart a path toward $200k+ revenue per employee and measure progress along that path.

Customer loyalty – What you want to know here is how referable your business is.  When you’re likely to be referred, you get leverage on those marketing and sales dollars spent each month.  Therefore, the higher the referability, the more you can invest in CPA.

There are many ways to measure customer loyalty, but Net Promoter Score is gaining momentum as the preferred method for software companies to measure loyalty.

Lifetime customer value - When you know how much a customer is worth to you over the life of the customer, your decision-making improves significantly.  You also know how profitable and healthy your business model is, how effective tweaks in your model are and how to adjust as you grow.

This metric is a super-metric because it is comprised of two critically important drivers of the business model.  LCV = Average Revenue Per User / Churn.  So, you can increase your LCV by increasing the ARPU or by decreasing the churn.  Play with this equation and it doesn’t take long to realize that churn rate is what makes or breaks a business model.  Furthermore, slight reductions in churn can make massive improvements in LCV.

Usage.  Every software company needs to know how its customers are using and adopting the software.  There are those who feel otherwise, but I feel that any software company wanting to drive long-term value for its shareholders needs to drive usage.  Usage is king.  Everything else falls in line nicely when customers use the company’s software.

Therefore a CEO needs to know how to measure and drive usage.  We’ve found that our customers need to launch multiple marketing campaigns to become “addicted” to our software.  Therefore, the critical usage metric for us is “percentage of new customers that have launched at least two campaigns within their first 60 days” or “60-day multiple-launch rate.”

As a software CEO, it’s easy to find yourself swimming in metrics, wondering what data really matters.  Over the years, I haven’t always stayed as focused on each of these five metrics as I should.  And every time I’ve strayed, it’s come back to haunt me.

[Homepage photo: blyzz]


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