Surely you can’t set your Key Performance Indicators (KPIs) up until your business is established and you know what success looks like, right? Wrong! You should know how you’re going to measure performance before you start pitching and raising funds for your business. As a company founder, it’s extremely important that you understand your business’ key performance indicators, and focus on these to drive growth.
KPIs help measure how well companies, business units, projects, or individuals are performing, compared to their strategic goals and objectives. Well-designed KPIs provide the vital navigation instruments that give us a clear understanding of current levels of performance.
If you set them correctly, KPIs will provide your investors with an analytical snapshot of the company, and the reasons why they should invest – without a sales pitch or emotion. Investors want the cold, hard facts of why they should invest and what the financial benefits are to them. KPIs can help you provide this and understand where to focus in the business to achieve these outcomes, especially if you focus on the meaning and impact for each one.
There are some key things to remember when setting KPIs – one of the easiest adages to go by is the acronym SMART, whereby you keep the KPIs that you set Specific, Measureable, Assignable, Realistic, and Time-related to ensure that they can actually be achieved and carried out.
Remember, your KPIs will be individual to your business and your strategies, so it’s important that you take the time to research what suits your startup and what the metrics/measurements should be. Here’s some food for thought when thinking about KPIs:
- Customer acquisition cost (CAC) – how much do you need to spend on average on sales, marketing, and other expenses to acquire a new customer. By understanding this, you’ll begin to understand more about your marketing efficiency. You can combine this with additional metrics to build a clearer picture to measure performance. It’s also a good idea to try and compare this to the CAC of your competitors, but we appreciate that this isn’t always easy! CAC recovery time is an extension of this – how long it takes a customer to generate enough net revenue to cover the CAC. This has a direct impact on cash flow.
- Customer retention rate – your customer retention rate is extremely important as it provides a measurement of how you’re servicing existing customers and whether they’re sticking around. This is extremely important at a growth stage, as keeping existing customers + acquiring new customers = growth. High retention rates suggest that customers are being kept happy, and is also an indicator of capital efficiency. Churn (or attrition) is the opposite of this, and is the number of customers you lose in a given period of time.
- Lifetime value (LTV) – this focuses on the net value of an average customer to your business over their estimated relationship with your company. This is one of the measurements that work extremely well with CAC – a true indication of how sustainable a company will be.
- Overhead relative to revenue – this measures fixed expenses (the number of customers is irrelevant in this measurement, as overhead stays the same whether there are 10 customers or 100). It’s important to measure this in relation to revenue, as the likelihood is that this reflects how profitable the company is. An understanding of revenue and monthly expenses (both fixed and variable) enables you to calculate cash flow and monthly burn. This is also beneficial for understanding runway – a critical factor for any startup – which measures the amount of time until a company runs out of cash, expressed in terms of months.
- Profit margin – this should be a no brainer, what’s the profit margin on your product or service? How much is the markup? What is the return on investment?
- Conversion rate – how many people need to see your product before they move to purchase it? How many eyes do you need to get in front of to sell a product or service?
Certain businesses find that revenue may not be the most informative indicator of their financial performance. This is especially true for marketplaces for which revenue (i.e., their take rate) represents a small portion of overall transactions. Gross merchandise volume (GMV) can be a useful KPI in these cases.
GMV is the overall dollar value of sales of goods or services purchased through a marketplace.
For businesses that specialize in apps, online games, or social networking sites, monthly active users (MAU) is important. This is the number of unique users who engage with the site in a 30 day period. MAU is the number of unique users who engage with the site or app in a 30-day period. Obviously, a digitally-focused business will have additional KPIs that will be different from something that’s a bricks and mortar store.
Working from the overall goal of your business, through to your objectives and then what your KPIs will be, followed by the metrics and benchmarks you will use to measure and define these on an ongoing basis is key. You can’t just set and forget. By working to achieve your KPIs and being focused on what will make your business a success, it’s much more likely that you will get there. Not only that, it’s a good way to demonstrate your successes to potential investors, press, or news outlets as well as within your industry and to your competitors. It can help you to understand your customers too – what are their motivations?
The final key point about KPIs is, they aren’t just something you claim at pitch process and then never look at again. They’re something which should be monitored, reviewed, and refined at regular intervals – a KPI that you set at the beginning of the journey may look very different to a KPI that you set later on in the process when you’re more established or have maybe moved in a slightly different direction from what you expected.