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Consider gross churn rate, the magic number and gross margin

Finding go-to-market fit (GTM) is a pivotal moment for a startup. It means you’ve found a repeatable formula for finding and winning lead that can be written into a repeatable GTM playbook. But before you scale up 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 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 ratio (long-term customer value to customer acquisition cost), which is a measure of your business’ long-term financial outlook. If the LTV:CAC is over 3, you’re ready to scale.

Let’s unpack the three basic metrics:

Gross churn rate (GCR) is a measure of product-market fit (PMF). GCR is the percentage of recurring revenue lost from customers that didn’t renew. It answers the question: Do your customers stay with you? If your customers don’t stick with you, you haven’t found PMF.

GCR = Lost monthly recurring revenue / Total MRR.

Example: At the beginning of March, the company brought in $60,000 in MRR. By the end of the month, $15,000 worth of contracts didn’t renew.

GCR = $15,000 / $60,000 = 0.25, or 25% GCR.