The 3 Common Numbers That Startups Hide Behind
I recently had a conversation with a company that I've contracted to help with building out the Google Adwords platform for one of my companies, BottleKeeper, and was, well, astonished. I had sent something of an aggressive email based on less than exciting performance over the first months of our agreement, to which the company -- whom will remain nameless for now -- responded with an analysis of the numbers that were rather misleading. It wasn't that they were wrong or lying, more that they seemed to be missing some rather important details, and thus, were hiding behind the numbers to justify their cost and position.
Guess what? It didn't work for them and it won't work for you.
Related: Are You Catfishing Your Customers?
Let's look a few common mistakes that startups make when analyzing and using numbers to support their business and brand for sales, fundraising and the occasional cocktail party brag session.
1. Cost per acquisition
This stat, typically referred to as CPA in the online advertising world, is the average dollar amount expended to acquire one paying customer, and is one of the most important numbers in your business. In this particular case, I’m referring specifically to CPA for online customer acquisition -- although it absolutely applies to every business in existence and is also referred to as your customer acquisition costs (CAC).
My problem with this number, and what I specifically experienced that motivated this article, is that the CPA isn’t just the cost associated to the budget or spend that you’ve set over a given period of time. Instead, it’s the budget plus any and all costs associated with executing the budget -- such as the contract or employee costs, amongst a variety of other potential costs.
For example, if you’ve set your ad budget at $300 per month and you’ve had 10 conversions over that duration of time, your CPA is $30, right? Wrong. It’s actually $80 because you’re also paying the company $500 per month to manage the budget and execute the spend -- a delta of 266 percent and more than likely the difference between making money and losing money.
2. Gross revenue
Here’s the deal. The goal of a business should be not to generate as much revenue as humanly possible, it should be to generate as much net revenue as humanly possible. Now, I know what you’re going to say, “look at Snapchat, it's worth $19 billion and isn’t anywhere near having net revenue.” You’re not Snapchat and the odds aren’t in your favor to become the next Snapchat, so focus on building a business that actually makes money in excess of what it spends.
This point may seem basic, but it always amazes me -- the number of companies floating about the investment world that have no true idea or understanding as to how they’re actually going to make money to put in theirs or their investors' pockets. You can’t hide behind these numbers because, well, you won’t be in business for long unless you’re generating or intend to generate substantial net revenue.
There are always opportunities to spin the numbers inside your company to make them appear better than they are, and your traction statistics are a classic trap. Here, just like the previous points, is a place where founders tend to hide behind the numbers with some of the more common stats, including download figures, monthly unique visitors and wait lists for beta testing.
So you had 100,000 downloads of your new app in the first six months? Great. What is your rate of monthly active users (MAU)? Twelve hundred? Not so great. But your website is garnering 40,000 unique visits per month after three months? Great. What is your conversion rate on that traffic? Point eight percent? Not so great.
As you can see, and have likely experienced in one form or another, there are ample opportunities to hide behind numbers that really only accomplish one thing: false perception, which in turn leads to distrust. I’m not suggesting that you tell your dinner party guests what your net revenue was for 2014 when they inquire as to how the business is going.
Instead, I ask that you be more conscious of the stats that flow from your yapper and the validity, if any, that they represent. If you can’t find it in you to be honest with those that you’ve chosen to surround yourself with, do yourself a favor and, at minimum, be honest with yourself.