Startup KPIs
The KPIs every startup should track - PART ONE
Market, Business, & Customer KPIs
By Robin Anderson
As a startup, you’ll hear many things about the importance of understanding your market, managing your business and keeping track of your customers. There are metrics associated with each core element of your business. These are known as Key Performance Indicators (KPI)s.
Definition of KPI
Key performance indicators (KPIs) refer to a set of quantifiable measurements used to gauge a company's overall long-term performance. KPIs specifically help determine a company's strategic, financial, and operational achievements, especially compared to those of other businesses within the same sector.
PART ONE of this blog is designed to help you understand the most relevant Market KPIs, Business KPIs and Customer KPIs. We’ve provided the details about how to calculate them, all of which will help you determine which ones are important for your startup. Your goal is to understand the KPI metrics that are most relevant to your startup so that you can focus your efforts on optimizing those most important for success.
Market KPIs
While every startup founder dreams of becoming a unicorn, it’s hard to do that without knowing the market capacity. When mapping your product to the market, take a step back to understand the potential scale of the market and then more specifically, the scope for your product. That will help in setting your revenue goals. There are a variety of sources to use when calculating your TAM and SAM. These include industry reports, financial reports and market research reports - many of which you can find online.
Total addressable market, also known as total available market (TAM) is the total revenue opportunity available for a product or service.
Serviceable available market (SAM) is the portion of TAM targeted and served by a company’s products or services within your geographical reach. This is a subset of TAM which accounts for the constraints with distribution and adds the element of competition.
Serviceable obtainable market (SOM) or share of market, is the percentage of SMA which is realistically reached.
Business KPIs
Business KPIs are important as they help business owners gauge how well their business is performing over a given period of time. It’s important to define the KPI metrics that are the most relevant to your business - manufacturing will have different KPI’s than a business developing software. Listed below are common business KPI’s for startup founders.
Monthly recurring revenue is the amount of revenue your startups makes on a monthly basis.
Annual recurring revenue is the amount of revenue your startup makes on a yearly basis.
Annual revenue per customer is the average revenue generated from each customer per year. This is calculated by dividing the total revenue of the business by its total number of users.
Overhead is the company’s fixed expenses. Overhead relative to revenue is a reflection of the capital efficiency of that company.
Monthly burn is a company’s monthly net cash flow. A fixed burn-rate pertains to operating expenses, rent, overhead, and salaries. Variable burn-rate, such as cost of sales, and direct costs of goods, are expenses that vary each month.
Runway is the amount of time a company has until it runs out of cash.
Profit Margin is the selling price of your product above cost.
Cost of goods sold is how much of your profit will need to go into delivering the product/service to your customer.
Conversion rate is the rate to convert prospects into customers.
Churn rate, also known as the rate of attrition or customer churn, is the rate at which customers stop doing business with an entity. It is the percentage of service subscribers who discontinue their subscriptions within a given time period. This signals dissatisfaction with a company’s product or service.
Additional KPIs can include Accounts Receivable, Accounts Payable, Scheduling (for operations), Payroll and more. Define your business KPI’s, set goals, then monitor them regularly.
“The most successful founders tend to be those who have an obsessive focus on their KPIs and the drive to constantly experience and optimize them.”
Customer KPIs
Customer KPIs related to acquisition, growth, and retention, enables startup founders to monitor how a company is progressing in the marketplace. Applying KPI metrics to marketing campaigns helps to measure the effectiveness of a campaign in achieving your customer KPI goals.
“It’s important to pay attention to customer acquisition costs and to note whether a customer churns before you have made back the money spent on acquiring that customer.”
Customer acquisition cost (CAC) is the cost spent on sales/marketing to acquire a new customer. Track the amount of time associated with the costs for marketing and sales to gain new customers and your customer retention rate which is the percentage of paying customers who remain customers during a defined period of time.
Customer lifetime value (LTV) is the total amount of money a customer is expected to spend with your company over their lifetime
The ratio of CAC to LTV is considered to be the golden metric. “This is a true indicator of the sustainability of a company. If a company can predictably and repeatedly run x into 10x (note: 10x is just an illustration and not meant to imply any sort of minimum or standard), then it’s sustainable.” CLV-to-CAC shows the lifetime value of your customers and the total amount you spend to acquire them — in a single metric. Simply compare your CLV and CAC. Generally, a healthy business should have a CLV that is at least three times greater than its CAC. Any lower (say, a 1:1 ratio) and you're spending too much money. Any higher (a 5:1 ratio) and you're spending too little and probably missing out on business.
Customer growth rate is your current customer number and subtracting the previous customer number. Divide that amount by the previous size. Multiply that by 100 to get the percentage.
Return on Advertising Spending (ROAS) is calculated by dividing your revenue by the cost of advertising
Customer engagement rate is calculated as total engagement divided by total followers, multiplied by 100.
Net Promoter Score (NPS) helps you measure customer experience and perception of your brand and can also help you predict growth.
“How likely is it that you’d recommend (startup name or product) to a friend or colleague?” You subtract the number of detractors who identified as unhappy customers from the number of promoters (those who are loyal enthusiasts) to determine the NPS.
“What gets measured gets improved.”
While setting goals, monitoring, and measuring your market, business, and customers can be time consuming and occasionally overwhelming, it’s the best way to ensure your business remains healthy. In addition to the KPIs included in this blog, there are additional KPIs related to customer acquisition and digital marketing. PART TWO of our KPIs series will help you to identify and measure those that are most relevant to your company.
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Fun Fact Friday
From The KPI Institute - Exactly when KPIs were established is not known. However, it is believed that KPIs date back to the emperors of the Chinese Wei Dynasty (221-265AD - 3rd century). They used a 9-rate system to rate the performance of official family members as individuals performing tasks as part of a group.