Consider the gross churn rate, magic number, and gross margin
Find the fit in the market (GTM) is a pivotal moment for a startup. This means you’ve found a repeatable formula for finding and earning a lead that can be written into a repeatable GTM playbook. But before you increase your sales and marketing, you need to check the metrics to make sure you’re ready.
So how do you know when your startup is ready to scale? I will help you answer this question using numbers that you can calculate on a napkin.
You have to consider three metrics – gross churn rate, the magic number and Gross margin. With these, you can measure the health and profitability of your business. By combining them into a simple equation, you can get your LTV: CAC (long-term customer value over customer acquisition cost), which is a measure of your company’s long-term financial prospects. If the LTV: CAC is greater than 3, you are ready to evolve.
No matter what your business, it’s worth spending some time with these metrics to find realistic targets that will push the LTV: CAC above 3. Otherwise, you might run into a rush.
Let’s decompress the three basic metrics:
Gross churn rate (GCR) is a measure of product-market fit (PMF). GCR is the percentage of recurring revenue lost by customers who did not renew. It answers the question: do your customers stay with you? If your customers aren’t following you, you haven’t found PMF.
GCR = Loss of monthly recurring income / total MRR.
Example: In early March, the company reported $ 60,000 in MRR. At the end of the month, $ 15,000 in contracts had not been renewed.
GCR = $ 15,000 / $ 60,000 = 0.25, or 25% GCR.