So, you’ve closed your first few customers and begun hiring employees on your path to rocket-ship growth.
When you’re an early-stage startup, rigorously tracking analytics and finding growth opportunities is essential. But how can you measure success consistently?
The answer is Key Performance Indicators (KPIs).
Introducing KPIs into your startup strategy can improve your decision-making and prioritise critical areas of your business, such as user engagement, product-market fit, and marketing efforts.
As your startup evolves, so should the KPIs you focus on. You can reassess and prioritise the best opportunities for growth.
If you're looking for a concise answer on which KPIs to track, I suggest narrowing it down to three.
These should be related to acquisition, retention and profitability. For example:
If you are not familiar with these acronyms, don't worry as I will explain them. This article provides a detailed overview of 33 key performance indicators that you can track.
KPIs play a crucial role in the success and growth of emerging businesses. They measure a startup's progress toward achieving its objectives.
They are important for four main areas
Click the metric to jump ahead and find out what they are, how they are tracked, and how you can use them.
These metrics provide insights and a feedback loop to steer your startup in the right direction.
The better you understand your KPIs, the more your startup can grow and succeed. To make data analysis more efficient, consider using tools like KPI dashboards.
By understanding which stage your startup is currently in, you can effectively manage cash flow, marketing efforts, and other operational activities according to the specific KPIs for that stage.
During the existence stage, your startup primarily focuses on two areas.
At this stage, resources may be stretched thin, and team roles may not be strictly defined, leading to members juggling multiple tasks. Success in this stage depends on attracting customers and meeting their needs with your offerings.
The next stage is survival, where the main KPIs are
As the startup progresses to the success stage, it will have shown consistent financial health. Here, new sets of KPIs become important.
These may include
This stage might also see the introduction of key managerial roles, which can be tracked through the performance of their respective departments.
As the startup enters the take-off stage, the focus shifts to strategic planning and risk management. At this point, your KPIs must consider a comprehensive plan for sustained growth, profitability, and an appropriate balance between risk and debt.
For the purpose of this article, I will focus on KPIs relating to the existence and survival stages that are most relevant to fledgling companies.
When setting goals, they should be SMART: specific, measurable, achievable, relevant, and time-bound.
Some examples of SMART business goals include increasing revenue by 20% in six months, acquiring 50 new clients within three months, or reducing operating costs by 30% within a year.
Setting SMART growth goals help you stay focused on expanding your business while maintaining resource allocation efficiency. Accomplishing these targets also creates a strong foundation for long-term sustainability and success.
Customer acquisition can be broken down into two main areas.
CAC represents the cost of acquiring a new customer for your business.
To calculate CAC, divide your total marketing and sales expenses by the number of customers acquired during a specific period.
It can be measured for an individual channel (for example, Google Ads) or the entire business. Personally, I think a leadership team should look at the overall CAC, while the marketing/sales teams focus on specific channels.
Keeping your CAC low is essential for a sustainable business model. It also helps you understand the efficiency of your marketing efforts.
In addition to CAC, you should consider the customer lifetime value (CLV) of the new business you acquire. CLV predicts the net profit attributed to a customer's future relationship.
Work this out by working out the customer value.
If you sell a monthly service, you can estimate this by
Alternatively, if you sell a product, you can work out lifetime value by
Here you combine the previous two metrics to measure campaign profitability and efficiency. CLV/CAC helps you understand the true value of a customer and how much you should spend to acquire them.
You do not want the ratio to be too low. This indicates that the acquisition cost is too low to be long-term profitable.
Similarly, a high ratio indicates that you are leaving money on the table by not investing enough in marketing. A less frugal competitor can quickly claim market share without eating into margins by simply spending more.
Aim for a ratio between 3:1 and 5:1 to ensure a good balance.
Related to customers' cost and lifetime value is the concept of the payback period. Here you measure how long it takes to pay back the acquisition cost of new business.
For example, if the average acquisition cost is £500 and new customers pay a monthly fee of £50, the payback period is ten months.
This has interesting implications for your calculations. If many users cancel after six months, your business could end up operating at a loss if you cannot improve churn rates. Conversely, if you can retain users for over ten months then each additional month of subscriptions adds incrementally more profit margin.
Measuring sales and marketing performance helps you optimise your campaigns. A few essential marketing KPIs include:
Lead generation refers to the process of attracting potential customers who are more likely to buy your product or service. These leads have been vetted according to criteria like their interest level, budget, or buying timeline.
Qualified leads can be measured through your sales funnel by applying your lead qualification criteria.
Qualified lead criteria may vary from business to business. They could include factors such as a prospect's company size or sector, their activities on your website, or responses to sales questions.
By tracking qualified leads, you get a clearer picture of the effectiveness of your marketing efforts and the potential for sales.
Lead conversion is a metric that tracks how many of your leads actually become paying customers.
To calculate your conversion rate, divide the number of conversions by the total number of leads, then multiply the result by 100 to get a percentage.
It's not just about generating leads, it's about generating quality leads that are likely to convert. Thus, tracking your conversion gives you a direct insight into the effectiveness of your sales process and the quality of leads you're attracting.
Also, this KPI helps you identify areas in your sales funnel that may need improvement. You may have a lot of initial interest, but if the conversion rate is low, you'll need to examine why leads aren't converting and adjust accordingly.
Remember, a higher conversion rate generally indicates a better match between the product and its target audience and more effective sales and marketing processes.
NOTE - What about traffic or engagement?
You may also see recommendations for tracking metrics like social media engagement or website traffic. However, I don’t think they should be classed as key performance indicators. They are better used as lead measures towards a larger goal.
Yes, you want to increase traffic and reach, but there is a risk in focusing on vanity metrics. By focusing on qualified lead generation and your conversion rate, you can ensure that traffic actually drives business value.
Product/service metrics focus on three areas
For firms with complex logistics, the on-time delivery rate is a measure of how often your business can deliver its product or service to customers on time.
To calculate on-time delivery rate, you divide the number of orders delivered on time by the total number of orders, then multiply the result by 100 to get a percentage.
This KPI can provide insights into your supply chain efficiency and the effectiveness of your operations. A high on-time delivery rate is usually a sign of good operational efficiency, whereas a low rate may indicate problems in the supply chain that need addressing.
Remember, consistently delivering on time builds trust, and can increase customer satisfaction and repeat business.
The quality defect rate is a measure of the percentage of your products or services that are found to have defects.
To calculate your quality defect rate, you divide the number of defective units by the total number of units produced and then multiply the result by 100 to get a percentage.
This KPI is a critical indicator of the quality of your production process and helps identify any issues that need to be addressed in the manufacturing process.
Consistently monitoring quality defect rates can ensure that you maintain high product standards. These standards can, in turn, lead to increased customer satisfaction and loyalty.
The Net Promoter Score is a metric that gauges customer loyalty by asking customers how likely they are to recommend your product or service to others.
Customers respond on a scale from 0 (not at all likely) to 10 (extremely likely). Those who respond with a score of 9 or 10 are considered "Promoters", while those who respond with a score from 0 to 6 are considered "Detractors".
NPS is then calculated by subtracting the percentage of Detractors from the percentage of Promoters.
This KPI provides insights into overall customer satisfaction and loyalty and can indicate potential growth. High NPS scores are often associated with strong and profitable businesses.
It's important to keep in mind that NPS is more than a number. It's crucial to follow up with customers to understand their ratings and use their feedback to improve.
The Customer Satisfaction Score (CSAT) is a straightforward and commonly used measure of customer satisfaction.
To measure CSAT, you typically ask your customers to rate their satisfaction with your business, product, or service on a scale. This can be a binary choice (satisfied/unsatisfied), a scale from 1-3, 1-5, 1-10, or even a yes/no question.
Then, the CSAT score is calculated as the average of these responses. If you're using a binary or yes/no scale, it's the percentage of positive responses. If you're using a numbered scale, it's the average rating.
CSAT is a useful tool to assess the short-term happiness of your customers. It is commonly used after interactions like support calls, purchasing a product, or using a service. Because of this, it can help you pinpoint issues or successes in specific areas of the customer experience.
Remember: CSAT can change rapidly and doesn't measure the whole customer journey. It is best used in combination with other metrics like NPS.
Customer Retention Rate (CRR) is a vital metric for early-stage startups. It provides insight into your ability to maintain customer engagement and satisfaction.
To calculate CRR, you take the number of customers at the end of a period, subtract the number of new customers gained during that period, divide the result by the number of customers at the start of the period, and then multiply by 100 to get a percentage.
A high CRR indicates robust customer relationships, which can also imply a high customer lifetime value. Tracking your CRR can offer valuable insights into the success of your customer loyalty and satisfaction efforts.
On the other side of retention is the Customer Churn Rate (CCR), which shows the percentage of customers who cease using your service.
CCR is calculated by dividing the number of customers who churned by the number of customers at the start of the period and then multiplying by 100 to get a percentage.
A low CCR is a positive indicator of your business's performance. Regularly monitoring your CCR can help you identify potential issues early and allows for necessary adjustments to prevent further customer loss.
Understanding your CRR and CCR can help fine-tune your business strategies, ensuring customer satisfaction and business growth.
The activation rate is a vital KPI. It quantifies the percentage of users performing a critical action, such as signing up or utilising an essential feature. It may also be referred to as ‘time to first action’.
The activation rate gives an insight into the perceived value of your product from the user's standpoint. Examples could include
To calculate activation rate, divide the number of users performing the key action by the total number of users and multiply by 100 to get a percentage.
To improve the activation rate, try:
DAU tracks the number of unique users who engage with your product daily. This metric helps you understand user engagement and determine product stickiness. A higher DAU means that users find value in your product.
To boost DAU, consider:
MAU counts the unique users who engage with your product over a month. It offers a broader view of user engagement than DAU. A higher MAU indicates a growing user base and good customer retention.
Increase MAU by:
Monitor these metrics closely to identify trends and optimise your startup's growth. Remember, engaged users are likelier to become loyal customers and share your product with others.
Tracking your cash flow is essential to financial stability and business planning. These metrics typically fall into two themes.
The burn rate refers to the rate at which your startup spends its capital before it generates profits.
To calculate burn, subtract your cash balance at the end of the month from the cash balance at the beginning of the month.
It is important to differentiate between Gross Burn Rate and Net Burn Rate. Gross Burn Rate refers to monthly operating costs. However, Net Burn Rate considers any revenue generated by the startup and deducts this from the gross rate.
Example Net Burn Rate:
Gross Burn Rate: £15,000
Monthly Burn: £15,000 - £5,000 = £10,000
This metric gives you insight into how quickly you're using up resources. A high burn rate could signal the need to revisit your spending habits, while a low burn rate might indicate you're in a good position to invest more into your growth.
Remember that the ideal burn rate can vary depending on your startup's stage, industry, and growth strategy.
Runway is the estimated amount of time that your startup can continue operating at its current burn rate before it runs out of money.
To calculate runway, you divide your current cash balance by your burn rate.
This KPI is critical for any startup, as it forecasts how long you have to reach profitability or secure additional funding before your cash reserves are depleted. The longer the runway, the more time you have to turn things around if your current strategies aren't working.
Keep in mind that you should aim to have a runway of at least 6-12 months to handle unexpected expenses or challenges.
Operating Cash Flow (OCF) measures the cash generated from your startup's core operations.
OCF is calculated by adjusting your net income for non-cash expenses (like depreciation) and changes in working capital.
Positive OCF means your company is generating enough cash from its business operations to sustain itself. Negative OCF can be a warning sign that could have problems maintaining your operations in the long run.
Regularly monitoring your OCF can help you understand the health of your business operations and make informed decisions about investing in growth, paying off debt, or returning capital to investors.
The Cash Conversion Cycle (CCC) measures how long each dollar invested in production and sales takes to return as cash from customers.
You calculate CCC by adding the Days Inventory Outstanding (DIO) and Days Sales Outstanding (DSO), then subtracting the Days Payable Outstanding (DPO).
A shorter CCC means you're converting your investments into cash more quickly, which is generally better for your cash flow. Monitoring this metric can help you identify inefficiencies in your production and sales processes and take steps to improve them.
The Working Capital Ratio, also known as the Current Ratio, is a measure of your startup's short-term financial health and efficiency.
You calculate the working capital ratio by dividing your current assets by current liabilities.
This ratio shows whether you have enough short-term assets to cover your short-term debt. A ratio of 1 or higher usually indicates good financial health, while a ratio below 1 might signal potential liquidity issues.
The Quick Ratio, or the Acid-Test Ratio, measures your startup's ability to meet its short-term obligations with its most liquid assets.
To calculate the quick ratio, add cash and cash equivalents, short-term investments, and accounts receivable, then divide by current liabilities.
This ratio is a more stringent measure of liquidity than the Working Capital Ratio, as it excludes inventory from current assets. A Quick Ratio of 1 or more is typically considered healthy, indicating that you can pay off your debts without selling inventory or making more sales.
Early-stage startups need to focus on revenue growth. Here, the key metrics look at
The Total Addressable Market, or TAM, represents the total revenue opportunity for a product or service. In simpler terms, it's the total money your startup could make if you achieved 100% market share in your industry.
To estimate your TAM, you could use a top-down approach by researching industry reports or a bottom-up approach by estimating how many customers might be willing to buy your product and at what price.
Understanding TAM is essential for any startup as it helps to frame the size of your business opportunity. However, remember that it's just an estimate, not a guarantee. You should also consider other market factors and the competitive landscape.
Investors might also use this number to understand the scale of your business and calculate its potential return on investment.
Remember, TAM represents a ceiling, not a target. It's the maximum revenue you could achieve, not what you're likely to achieve. Therefore, it's also important to calculate your Serviceable Available Market (SAM) and Serviceable Obtainable Market (SOM) to better understand the immediate opportunities.
Average Revenue Per User (ARPU) measures the revenue generated per user or unit. It's commonly used by companies that offer subscription-based services.
To calculate ARPU, divide total revenue in a certain period by the number of users during that period.
ARPU helps you understand each user's value to your business and is crucial in pricing and marketing strategies. Tracking ARPU over time can highlight trends and growth potential, allowing you to adjust your strategies accordingly.
Monthly Recurring Revenue (MRR) is a measure of the predictable and recurring revenue components of your subscription business.
MRR is calculated by multiplying your total number of paying users by the average monthly revenue per user.
MRR is a critical metric for subscription-based businesses, providing insight into revenue trends and growth rates. By monitoring MRR, startups can better understand their revenue generation and financial future.
Similar to MRR, Annual Recurring Revenue (ARR) measures your subscription business predictable and recurring revenue components, but over an entire year.
To calculate ARR, multiply your total number of customers by the average annual revenue per customer (or multiply MRR * 12).
ARR gives you a longer-term view of your revenue trends and is particularly useful for businesses with annual contracts. A steadily increasing ARR indicates a healthy business with growing revenue.
The revenue growth rate is a measure of the percentage increase in revenue from one period to the next.
To calculate revenue growth rate, subtract the previous period's revenue from the current period's revenue, divide the result by the revenue from the previous period, and then multiply by 100 to get a percentage.
Monitoring your revenue growth rate can help you track the effectiveness of your sales strategies and set realistic growth targets. Consistently high revenue growth can also make your startup more attractive to investors.
Understanding your business's financial standing and profitability is crucial for strategic planning and sustainability. It is also a key measure of interest to investors and employees wanting to know whether they are backing the right firm.
Break-even analysis determines the point at which your total cost equals your total revenue. This means you're neither making a profit nor a loss.
To find your break-even point, you calculate fixed costs divided by the unit selling price minus the variable cost per unit.
Knowing your break-even point is crucial. It's the minimum you must achieve to ensure your business is viable. This analysis allows you to understand how much you need to sell to cover your costs and begin making a profit.
The variable cost ratio indicates what portion of each sale is made up of variable costs (costs that change based on the level of output).
To calculate the variable cost ratio, you divide variable costs by net sales.
This KPI is useful for understanding how variable costs impact your break-even point and overall profitability. High variable costs mean lower gross profit margins, which may require a higher sales volume to reach profitability.
Fixed costs are expenses that do not change regardless of the level of output.
Fixed costs may include rent, salaries, and software subscriptions.
Knowing your fixed costs is essential to understanding how much you need to sell to cover these costs. Keeping your fixed costs low can help you reach break-even faster and improve profitability.
The Contribution Margin Ratio is the selling price per unit minus the variable cost per unit.
To calculate contribution margin, subtract the variable cost per unit from the unit selling price, then divide by the unit selling price.
This metric tells you how much each unit sold contributes to covering fixed costs once variable costs have been paid. It's useful for understanding the profitability of each product or service you sell.
Sales volume is the number of units sold within a specific reporting period.
Sales volume is calculated by simply counting the number of units sold.
Increasing your sales volume can move you closer to your break-even point. However, it's also important to maintain a healthy profit margin per unit to ensure overall profitability.
Price Elasticity of Demand measures how the quantity demanded of a good responds to a change in its price.
To calculate demand elasticity, you take the percentage change in quantity demanded and divide it by the percentage change in price.
Understanding elasticity helps you know how pricing changes impact demand and your break-even point. This can influence your pricing strategy and your predictions for sales volume.
Gross Margin is calculated as sales revenue minus the cost of goods sold (COGS).
To calculate gross margin, subtract the COGS from sales revenue, then divide by sales revenue.
Gross margin represents the total sales revenue that your company retains after incurring the direct costs associated with producing the goods and services sold. It indicates your company's profitability at its most fundamental level.
Profit Margin is a profitability ratio calculated as net income divided by revenue, or net profits divided by sales.
Profit margin measures how much out of every dollar of sales a company actually keeps in earnings.
A high-profit margin indicates a more profitable company with better control over its costs than its competitors. Therefore, monitoring your profit margin can help you pinpoint how effectively your business is at earning.
Agreed, you don’t want to track every possible KPI rigorously. But knowing where to focus depends on your business model.
You should consider focusing on three areas: acquisition, retention and profitability.
For example, building a dashboard to measure the below KPIs could give a good indication that you are selling profitably and retaining business efficiently.
Okay, now we are talking. If you focus on one primary KPI you can narrow down to the one overriding goal the entire company should get behind.
This creates alignment and strategic focus that you will simply not get if you try to tackle too much.
The North Star Metric should be something that every business function can contribute to.
Here are some examples from other companies in their early stage
Your focus depends on your business structure, industry, employees and strategic goal. (That’s the long-winded way of saying ‘it depends’ again)
You may make this into a SMART goal of
Improving customer retention rates by 10% over twelve months
Here’s how each function contributes in a collaborative way.
I hope that you found this deep dive useful. If you still have questions on analytics and growth strategy, contact me and let me know.
Looking for advice on the right KPIs to track? Reach out for a strategy audit to let me know where you want to go and I can help you get there.