KPI: A Guide for Startups
You’ve probably often heard of KPI even if you are not sure what it includes.
You’ve probably often heard of KPI even if you are not sure what it includes. That is because it is one of the most overused and misunderstood terms. It is often taken to describe any metric or data in business, which is wrong. This post is breaking down Key Performance Indicators to help you use them to your biggest benefit.
Startups have a lot on their plate, but measuring KPIs is something you can’t forget. When used correctly, they act as a compass to growth. KPIs are what can let the stakeholders have an objective look at the state of your startup company. Every business should have them, but for startups, it’s vital. They help you determine what strategies are working, what money was spent well, where you slipped up, and what to do next.
However, not all KPIs are the right match for your startup. You need to determine and start tracking them early. Otherwise, you will navigate in the dark. According to TRIARE CEO Boris Abazher, “KPIs should be defined before the product or service is developed and be as clear as possible. All the focus of the dev and marketing team should be around them.” So, if you are reading this post, you’re on the right track.
Let’s begin with a definition.
What is KPI in marketing
Simply put, a key performance indicator is a measurable value of your company’s performance, that can help fine-tune your budget and achieve desired objectives.
While the terms “KPIs” and “marketing metrics” are often used interchangeably, they are not exactly the same. KPIs are a special type of marketing metrics, not all metrics are KPIs. You can use a plethora of metrics, which usually help assess your campaigns. Only several of them refer to the success of your business overall. It’s important to understand which metrics you should actually define as key.
- Be measurable, or quantitative (come in the form of numbers)
- Be linked to specific time frames (usually)
- Be meaningful, steer future decisions and strategic positioning
- Help track crucial goals and determine if a company’s results are improving
- Help you distinguish between successful and unprofitable decisions
- Be based on legitimate data gathered by you, which is relevant to business objectives
- Be actionable, or have the possibility for improvement
Not every company uses the same KPIs. They may vary depending on your type of industry, objectives, activities, etc. With thousands of metrics for any given business, narrowing down the list can be tricky.
Luckily, we are here to provide helpful insights. We have worked with almost a hundred startups, through our 12-week MVP program and a partnership with the Founder Institute. We’ve been there for many founders since the very beginning: helping with research, planning, and creating a data-driven startup business plan. We followed them through the development phase and offered ongoing support. Finally, we are startup entrepreneurs ourselves. And we are ready to share the knowledge.
Here is the list of the most common KPIs for startups, according to our CEO.
- Customer acquisition cost (CAC)
- Lifetime value (LTV)
- Monthly active users
- Gross merchandise volume
- CAC recovery time
- Customer retention rate
- The ratio of CAC and LTV
- Conversion rate
So, as a start-up, what key indicators do you need to track? We recommend considering the shortlist below, with all the necessary formulas and important notes.
How to measure KPI
GMV – Gross Merchandise Volume
This metric can be a little inflexible in terms of predicting the startup’s potential, but it is still very popular with investors. They want to know how much money is coming in your business, and this is exactly what GMV or Gross Merchandise Volume is for.
GMV is an eCommerce term, another way to calculate your gross revenue, which shows the total sales value over a given period. There are a few ways to calculate GMV. This is the simplest formula:
GMV = (sale price per item) x (the number of items sold)
In other words, you multiply the sale price per item by the number of items sold. For example, if you sell 10 items for $100 each, the GMV is $1,000.
MAU – Monthly Active Users
This is the next best thing to measure the growth rate after a revenue, especially for start-ups that aren’t charging initially. This metric for user engagement is often used by online businesses (apps, games, social networks, etc.) Essentially, MAU is the number of customers who interacted with your product within a given timeframe. This KPI is used to determine how frequently your product is being used, if users are actively engaged, and the ways to engage them more and increase retention rates.
The point is, measuring MAU is not as straightforward as it may seem. There are numerous ways to identify active users: counting those who visited, registered, collected a daily reward, or performed another type of action. It’s up to you what to take into account. For example, Facebook considers a user active, if they have logged in and clicked through on a link, commented, or shared something at least one time that month. Generally, a MAU formula will look like:
MAU = (the number of unique active users) during a (30-day period)
Additionally, you may want to check your DAU/MAU ratio (where DAU means daily active users). It provides insight into the so-called “stickiness” of your product (how many users repeat their actions).
CAC – Customer Acquisition Cost
CAC is one of the defining KPIs whether your startup has a viable business model. Customer Acquisition Cost is the total cost of the sales and marketing efforts that are needed to obtain a customer. It includes all marketing and advertising spent, customer service programs, technical costs, creative, publishing & production costs, salaries, commissions, overhead, inventory upkeep, etc.
Startups measure their success by comparing the sum they spend on customer acquisition against the number of their customers. They try to constantly reduce this metric to optimize processes and budget, gain higher profits, and, more importantly, testify the health of their model. In fact, higher than expected CAC is one of the biggest reasons why startups fail.
Customer Acquisition Cost formula is:
CAC = (total cost of acquisition) / (number of new customers)
Once you have calculated CAC, you can compare it against other KPIs. For example, LTV (lifetime value)/CAC ratio is known as the “golden metric”, which can show if you spend the right amount of money on every customer. The challenge is to spend just enough on acquisition without jeopardizing the LTV and revenue. A successful startup will have CAC sufficiently lower than LTV, ideally three times lower. So how do you calculate lifetime value?
LTV (CLV) – customer lifetime value
LTV is the projected revenue that a customer will generate throughout your relationship. This KPI is crucial to estimate future profits and determine how much you should invest to retain a customer. As discussed above, LTV in relation to CAC can reveal how long it takes to recoup the investment in acquiring new customers.
LTV can vary based on many factors, such as user types (consumer or business) plans (free or paid), degree of user engagement, etc. There are also multiple ways of calculating LTV. We are going to describe one of the most popular ones in a predictive approach. It is a little lengthy but comprehensive and accurate, a good choice to begin with. You will need to multiply your average purchase value with your average gross margin, purchase frequency, and customer lifespan.
How to calculate lifetime value:
CLV (total) = (Average Purchase Value × Gross Margin × Purchase Frequency × Customer Lifespan)*
Finally, you can consider the total number of customers at the end of the given month:
Predicted CLV = CLV (total) / (number of clients for the period)
* Average Purchase Value is the average value of a customer transaction (whether it is a product, cart with several items, or a subscription).
* Average Gross Margin defines what part of each purchase is profit and what is cost, it can be calculated with the formula: (Total Revenue – Cost of Sales) / (Total Revenue).
* Purchase Frequency is the average number of customer transactions over a given time frame, it can be calculated with the formula: (The average number of purchases) / (The average number of customers).
* Customer Lifespan is an average length of a customer relationship. Measure it in multiples of the same period as the purchase frequency. Note that a moment in time when a customer relationship is considered over can vary for different types of startups. You should define it individually (for example, 3 months of no activity on your app, no renewed subscription, etc.)
Tracking KPIs is a vital element of managing a startup. While there are no universal metrics, there are a few important, that can suit many. This article is a great guide for beginners, but your set of KPIs can and should be highly individual. We can help you check your business model through a Free Consultation.
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