Alice: “Would you please tell me which way I ought to go from here?”
The Cheshire Cat: “That depends a lot on where you want to get to.”
Alice: “I don't much care where.”
The Cheshire Cat: “Then it doesn't much matter which way you go.
It sounds obvious, but sometimes we forget. If we don't know where we're going, we can't take the necessary actions to get there. The path we choose becomes irrelevant. Many startups or businesses are like Alice. They aim for something great, but they haven't yet defined what exactly that is, so they can’t track if they are really getting there and take the necessary actions when they are not.
Key Performance Indicators (KPIs), are crucial values that allow us to see our progress toward our goals and objectives. Think of them as data-driven checkpoints. Is this action taking me where I intend to go? Is my company steering in the right direction? KPIs will answer exactly that.
Why is tracking and measuring KPIs so important for startups?
Without KPIs, decision-making becomes a gamble, relying on gut instinct rather than concrete data. Whether optimizing marketing strategies, refining user acquisition tactics, or enhancing customer retention, KPIs empower startups to make informed, data-driven decisions and ensure your business's continued growth.
Summarizing, the importance of KPIs lies in two key aspects:
1. KPIs allow for data-driven decisions: Intuition and gut feeling have their place, but in the fast-paced world of startups, relying solely on them can be risky. KPIs provide objective data, empowering you to make informed decisions backed by real evidence. Imagine testing two marketing campaigns and choosing the winner based on data-driven insights: that's the power of KPIs!
2. KPIs allow us to identify, quickly or sometimes even in the moment, areas for improvement: No startup is perfect. KPIs act as spotlights, illuminating areas where you might be lacking marketing efforts or even losing clients! By regularly monitoring and analyzing these metrics, you can identify weak spots, and more importantly, make the necessary adjustments.
The most important startup KPIs you need to track
KPIs act as navigational instruments, guiding startups through the tumultuous seas of entrepreneurship. So, now that we've established the critical role of startup KPIs, let's go into the specifics.
First, we have to understand that this is not a one-size-fits-all affair.
Example of KPIs for different businesses:
- Subscriber retention: Netflix's primary focus is to keep subscribers active on its platform. High subscriber retention indicates that users find value in the content and are satisfied with the service, driving Netflix's growth and continued success.
- Number of Monthly Active Users (MAU): Dropbox measures the number of users actively using its cloud storage platform monthly. The more monthly active users they have, the greater its success and its ability to drive growth and retain users.
- Hours Listened per User: This metric represents how many hours of music an average user listens to on Spotify. That’s why Spotify focuses on increasing user engagement and the amount of time they spend on the platform, which in turn drives the growth of their user base and the success of the company.
Even though the main KPI for each startup will vary depending on their niche, there are some general indicators that every ambitious entrepreneur should keep an eye on.
Let’s explore them:
1) Customer Acquisition Cost (CAC)
Possibly, the most important KPI for a startup: the Customer Acquisition Cost (CAC) reveals the cost involved in acquiring a new customer. Calculated by tallying the money spent on customer acquisition over a specific period and dividing it by the total number of new customers acquired, CAC can be viewed in two ways: Blended CAC and Paid CAC. The former considers acquisition across all channels, while the latter zeroes in on paid channels like Google Ads or Facebook advertising. Balancing both provides a holistic view, enabling startups to optimize their marketing strategies.
2) Average Revenue Per User (ARPU)
Also known as the compass for a startup growth strategy, Average Revenue Per User (ARPU) is calculated by the division of the Monthly Recurring Revenue (MRR) by the total number of active users. Startups with a higher ARPU can afford to allocate more resources to customer acquisition and premium customer support. This KPI offers insights into buyer personas, pricing strategies, and opportunities for upselling.
3) Customer Lifetime Value (LTV)
The Customer Lifetime Value (LTV) KPI illuminates the total amount a customer is expected to spend on a startup's products or services throughout their lifetime. Calculating LTV involves considering historical LTV, based on actual purchases, or predictive LTV, forecasting future spending based on transaction history and behavioral patterns. This KPI is a compass for strategic decisions, guiding startups on how much they can invest in acquiring a customer without sacrificing long-term profitability.
4) Monthly Active Users (MAU)
Monthly Active Users (MAU) refers to the total number of users who engage with a product in a month. A surge in MAU can be a result of successful marketing campaigns, product updates or reactivation efforts. On the other hand, a decline could indicate technical issues or the need for reactivation campaigns. By tracking MAU, startups can be proactive in responding to changes in their user base size, and can fine-tune their strategies for user acquisition and retention accordingly.
5) Customer Churn Rate (CCR)
Customer Churn Rate (CCR) is the number of customers who stopped doing business with a company divided by the total number of customers during a specific period. It's a vital metric for startups to keep an eye on their customer retention. Segmentation of customers into cohorts helps to identify factors affecting user retention and make targeted improvements.
6) Monthly Recurring Revenue (MRR)
There is no Leadership Weekly Meeting where this indicator is not addressed. Monthly Recurring Revenue (MRR) is the total revenue generated each month, and it is the key metric for startups to measure their financial health. To calculate MRR, you need to multiply the Average Revenue Per User (ARPU) by the total number of active users. It is important to differentiate between different types of MRR - New MRR, Expansion MRR, and Churn MRR - to get a comprehensive view and make informed decisions regarding budget allocation and strategic planning. Regular monitoring of MRR is crucial for startups, as it enables them to respond quickly to market dynamics and remain agile.
7) Revenue Growth Rate
The Revenue Growth Rate KPI measures a startup's success in revenue expansion over a specific period. A simple formula involves subtracting the previous period's revenue from the current period's, dividing it by the current period's revenue, and multiplying by 100. This KPI is not only a barometer of sustainability and profitability but also facilitates benchmarking against industry peers. Investors often scrutinize this metric, making it a crucial factor in securing funding and shaping operational plans.
8) Revenue Churn Rate (RCR)
Revenue Churn Rate (RCR) gauges the rate at which revenue is lost due to downgrades and cancellations. Calculated by subtracting the month-end MRR from the month-start MRR, factoring in upgrades, and then expressing it as a percentage of the month-start MRR, RCR is a litmus test for a startup's product-market fit. Segmenting RCR based on reasons for churn provides granular insights, enabling startups to address specific pain points affecting revenue retention.
So there. Don't lose your head over indicators that have nothing to do with your business or are just vanity metrics (they make you feel good but are not really bringing any money to the table).
Keep your goals clear, the way you are going to measure them focused and be flexible enough to make changes in your direction when the numbers are telling you to do so.
