Key performance indicators (KPIs) are essential to understanding the overall health of any business. We look at the top ten KPIs that startups need for success. As a startup founder, it is critical to understand your company’s key performance indicators (KPIs). After all, you cannot hope to scale and grow your company without focusing on the right metrics. The right KPIs provide you with hard, analytical data about the state of your startup, and understanding how you can improve on your KPIs is essential to business success.
How to Develop Your KPIs
While KPIs can vary depending on the industry you operate, however, some KPIs are universal for all startups. Before we look at the specific KPIs, let’s look at some guiding principles for creating meaningful KPIs:
1. Should be measurable: The adage, what gets measured, gets managed, holds true for most business metrics, especially KPIs. Without measurable goals your KPIs are meaningless. You must articulate what success looks like in numbers. Eg. EBITDA or Net Profit Margin. Your KPIs should be trackable in real-time and would ideally translate into a dashboard which gives you instant insight into your startup’s performance.
2. They should be aligned to your business goals: Your KPIs must reflect your business focus and how to seek to achieve them over a specific time period. Your KPIs would ideally include various performance metrics for your key business functions. For instance, if you run an e-commerce business, your KPIs should reflect cost per customer acquired or customer satisfaction score. Begin by identifying key pain points in your business or areas of improvement and then work backward to address these through well thought out KPIs.
3. They should be owned: Your KPIs should be owned by members of your leadership team. That is, someone must be in charge of monitoring and interpreting the KPI. They should also be able to optimize operations to improve the performance of the KPI they are responsible for. In short, someone should be accountable for each of your KPIs.
4. They should be time-bound: When your KPIs are specified and tied to a timeline for completion, you eliminate any ambiguity or confusion. Your employees will know exactly where they are heading and how long it will take. Eg. Reach X users by December 2020 or reach Rs. X in revenue by Q3. Adding the dimension of time to your KPIs provides context to your progress. When developed according to the guidelines mentioned above, your KPIs will become a powerful tool for improving performance, making better business decisions, and most importantly, gaining a competitive advantage. With that out of the way, let’s look at some of the top KPIs you need to track as a startup founder.
The Top 10 KPIs for Startups
As stated earlier, KPIs for different startups could vary depending on the industry and stage they are in. However, we focus on some KPIs that are applicable to most startups in the consumer and enterprise technology space. So, let’s dive in:
1.Customer Acquisition Cost (CAC): The cost of acquiring a new customer (CAC) is one of the most important KPIs for startups in both B2B and B2C space. If you are operating in a high-competition environment, your CAC is bound to be high. Deep discounting and generous referrals can quickly escalate the customer acquisition cost. Additionally, you might also incur significant marketing and advertising spends. A great way to calculate your CAC is by dividing the cost of your marketing and sales by the number of customers acquired over a specific time period. For instance, if you spend Rs. 1000 to get 10 customers, your CAC is Rs. 100.
2. Customer Lifetime Value (LTV): Also known as customer lifetime revenue (CLR) helps you measure the value that each customer brings to your business throughout their relationship with your company. Customer lifetime value is closely related to the future performance of your company. The more repeat business you are able to generate per relationship, the more valuable your operations become. Additionally, the ratio of CAC to LTV is one of the most important indicators of your business’ sustainability.
3.Return on CAC: This KPI measures how long it takes for a customer to generate enough net revenue to recover the initial cost of acquisition. Return on CAC has a direct impact on cash flow and ultimately your bottom line.
4.Customer Retention Rate: Your customer retention rate defines the percentage of customers retained over a given period of time. Customer retention rate is calculated by dividing the difference between customers at the end of a period and new customers by the number of customers at the start of the period.
5.Customer Churn Rate: Your customer churn rate is the percentage of customers lost during a given period of time. This can mean the lack of repeat purchase or the cancellation of services agreements. The customer churn rate is the inverse of the customer retention rate.
6.Gross Margin: Your gross margin tells you the difference between the total production costs of your product or service and the total revenues. Your total costs include CAC, product development costs, and overheads. Gross margin also helps you calculate your EBIDTA.
7.Burn Rate: For early-stage startups, this is arguably one of the most important KPIs to monitor. Your burn rate represents the rate at which you are spending cash. It helps you establish how long you have before you run out of money based on your current cash flows. Burn rate can be calculated by subtracting total cash outflow from total cash inflow for a specific period of time. A positive burn rate implies that you have spent more money than you have earned. Startups with high burn rates seldom make it to subsequent funding rounds. In fact, most startups fail because they run out of cash. Planning on becoming cash-flow positive or attaining a negative burn rate should be the number priority for early-stage startups.
8.Runway: The runway represents the time your startup has before it runs out of money and is expressed in terms of time. The runway is directly related to your burn rate and is calculated by dividing your current cash position by your monthly burn rate. Startups that invest heavily in marketing, advertising and discounting tend to have a shorter runway and must secure new financing quickly or perish.
9.Revenue Growth: This is a simple one. Revenue growth shows you that there is a demand for your product or service and that you have adopted an effective business strategy. Revenue growth is typically expressed over longer periods of time instead of weeks or months. Compounded Annual Growth Rate or CAGR is one of the most widely used measures of calculating revenue growth for semi-annual or annual periods.
10.Operational Costs as a Percentage of Revenues: Understanding how each business function contributes to the growth of your startup is critical for long-term sustainability. Categorizing your operational costs in terms of business functions like sales, marketing, and advertising, research and development, HR, IT, and administrative support, will help you put a number to the value that each of these functions bring in. After categorization of your major business function, you can represent costs incurred for each function as a percentage of your revenues. Since these costs do not directly impact the production of your product or service, you can reduce or increase them when required (e.g. operating costs can be reduced during a recession).
As a startup founder, it is more important than ever to understand which figures are most important for sustained performance and growth of your company. For startups with small teams, creating and managing these KPIs can quickly become challenging. Seeking external expertise in the form of a CFO partner can keep you on course and improve your startup’s performance.