Key Performance Indicators For Startups
Launching a new business can be an exciting, yet volatile adventure. Often times there are so many different tasks and roles to complete that at the end of the day you’re not quite sure where you stand and what you accomplished. Taking time to review the business and analyze the numbers is an important process to keep your startup growing and focused on your goals.
What is a Key Performance Indicator?
W. Edwards Deming famously said, “What gets measured gets done.” Frequent measurement and analysis keeps you and your team focused resulting in better decision making based on key performance indicators or KPIs. Key performance indicators are a numerical snapshot of your company’s most important metrics. These can include any activity, outcome, behavior or initiative in your company.
Before KPIs can be implemented, everyone in the company needs to understand what they are and why they are important. Next, the critical indicators should be determined and identify how easily the data can be obtained. The KPI should be conveyed as a mathematical formula which is calculated in the same manner every time. The selected key performance indicators should be available on a dashboard or community area so all of the team members can review them. Regular team meetings should be held to discuss the updated KPIs and adjust any decision making or strategic plans.
List of KPIs for startups
· Active Users
· Cash Burn Rate
· Conversion Rate
· Customer Acquisition Cost
· Customer Lifetime Value
· Gross Margins
· New Prospects and Clients
· Operational Expense as % of Revenues
· Revenue
· Runway
Active Users
The KPIs for active users are important metrics for online services, SaaS platforms, mobile apps and online games. Active users are the number of unique visitors or people that interact or perform activities on a website or app each month. The number of active visitors help identify potential revenue opportunities and predict future demand. Relevant KPIs for active users include:
Daily Active Users (DAU) = The amount of visitors that return to a website or app on each day.
Monthly Active Users (MAU) = The amount of visitors that return to a website or app every month.
Number of Logins = The number of times visitors have logged in to your website.
Cash Burn Rate
Startups should always know their cash burn rate and determines how long you can operate! A positive cash burn rate means that more money has been spent than earned in revenues, while a negative cash burn rate means revenues exceed expenses. Obviously all startups should aim for a negative cash burn rate. Relevant KPIs for cash burn rate include:
Monthly Cash Burn Rate = How much money is spend each month
Net Burn Rate = Revenues — gross burn
Gross Burn = Monthly expenses + any other cash disbursements
New Prospects and Clients & Customer Acquisition Cost
Outside of cash, finding and keeping new customers is also extremely important. Every company should have target goals on the number of customers they want to acquire each month. By using a conversion rate metric, companies can derive the number of new customers they expect to obtain. The cost to obtain a new customer is another important KPI. The customer acquisition cost identifies the effectiveness of your marketing and sales efforts. The relevant KPI for customer acquisition costs is: Customer Acquisition Cost (CAC) = Total expenses of acquiring new customers / total new acquired customers.
Customer Lifetime Value
Increasing the overall number of customers is great, but being able to identify the value of those customers to your business is very important as well. The customer lifetime value, also known as CLTV or LTV, is the amount of revenues expected during the timeframe that they will use your product or services. The relevant KPI for customer lifetime value equals the prediction of the net profit from the total future relationship with a customer.
Gross Margins
One of the most important metrics for any business is gross margin. This KPI displays the difference between your costs to product a product or service and its total revenues. A high gross margin means that the business has relatively low costs to produce their product. Gross margin is calculated by (total revenues — total production costs) / total revenues * 100%.
Operational Expense as a Percentage of Revenues
Displaying operational expenses such as sales and marketing, R&D and Administrative cost as a percentage of revenues is a metric that enables you to quick see where indirect costs are going.
To calculate operational expense as a % of revenues, total operational expense in that category / total revenues * 100%.
Revenue
Revenue, the lifeblood of any startup, should be constantly monitored and examined. Revenues can fluctuate based on marketing campaigns or seasonal demand for the products and services offered. Relevant KPIs for revenues include:
Monthly Recurring Revenue (MRR) = The amount of revenue you make that recurs monthly
Annual Recurring Revenue (ARR) = The amount of revenue you receive that recurs yearly
Annual Revenue per Account (ARPA) = MRR / Total # of Customers
Deferred Revenue = Amount that was received by a company in advance of earning it
Runway
Similar to cash burn rate, runway shows the amount of time the startup has left until the money runs out. This KPI displays the number of months left before revenues need to increase or the next round of funding needs to be pursued. Runway is calculated by taking the current cash position divided by the monthly burn rate.
Other Important KPIs
Other key performance indicators that may be useful to your business include:
Annual Contract Value (ACV) = The value that a contract will bring to your business annually
Annual Run Rate (ARR) = Projection of current MRR into the future, annualized
Billings = Current quarterly revenue + deferred revenue from the previous quarter
Compounded Monthly Growth Rate (CMGR) = (Last Month/First Month) ^ (1 / number of months) — 1
Customer Concentration Risk (CCR) = Revenue from largest customer / total revenue
Direct Traffic = Traffic coming directly to your site via a link or entering the URL
Gross Churn Rate (GCR) = MRR lost in a given month / MRR at the beginning of the month
Gross Profit = Total revenue minus the cost of goods sold
Monthly Churn Rate (MCR) = Lost customers this month / prior month total
Net Churn = (MRR lost — MRR from upsells) this month / MRR at the beginning of the month
Net Promoter Score (NPS) = How likely user is to recommend your product to a friend
Organic Traffic = Unpaid traffic from search results
Platform Risk = Dependence on a specific platform or channel
Retention by Cohort = % of original installed base (1st month) that are still transacting
Sell-Through Rate = Number of units sold in a period/number of items at the beginning of the period
Total Addressable Market (TAM) = Revenue opportunity available for a product
Total Contract Value (TCV) = Value of one-time and recurring charges
Conclusion
Start utilizing KPIs by identifying the most important items to measure in your startup business. After establishing the key performance indicators, consistently measure them in the same way and update them frequently to chart the increase or decrease in their value. Key performance indicators are a quick gauge of the health of the company to help identify strengths and weaknesses in business operations, make tactical decisions, and to make sure the business is growing and moving in the right direction.
