Startups have many things to focus on, but they can’t forget to track vital key performance indicators and metrics. By tracking metrics, owners and investors have an objective look at the performance of a startup.
I have strategically advised many startups and have been involved, as a board advisor and non-executive director, in acquiring startups. There are 6 vital areas of measurement that I would look at to evaluate the performance of a startup.
In the initial launch of a startup, the focus tends to be only on revenue and profits. However, if a startup has hopes of surviving and maturing, it’s essential to broaden what metrics and key performance indicators (KPIs) owners and managers monitor so that they can grow the business by using data instead of just intuition. The top KPIs a startup should focus on fall into six categories that we’ll review below.
Used correctly, KPIs give an objective assessment of your company’s performance and allow investors to get an analytical view of the state of your company. But, not all KPIs are the right match for your startup. When you track the correct KPIs for your startup, you can develop a strategy or a set of strategies to optimize company performance.
Here are the six categories of vital KPIs and metrics every startup should measure.
A startup, like any business, needs to understand its market. Thorough market research allows a startup to understand its potential customers and if they have a market sizable enough to make the sales that are required to become profitable. Companies must have a solid understanding of what portion of the available market they might be able to capture, called the market share. The total addressable market (TAM) is usually the first market size to calculate and represents the number of customers (or amount of money) available if you made 100% of the sales to every potential customer. The target market is a subset of the TAM and is the market that your startup could reasonably expect to reach. If you’re like every other company or startup, you will face competitors who are going after the same customers. It’s important for you to track your market share distribution as well as who else is holding market share and how it is shifting.
Another vital metric startups should track is income. Some key revenue metrics include MRR (monthly recurring revenue), the amount of revenue your startup makes that recurs monthly; ARR (annual recurring revenue), the amount of revenue that recurs annually; annual revenue per customer and the customer lifetime value. The customer concentration risk is something many overlook, but it’s critical. If a company earns a significant amount of income from one company or industry, it will be more vulnerable than if income is coming in from a variety of companies and industries. Other important income metrics include month-over-month growth (the change in value as a percentage of the previous month’s value), break-even, profits and profit margins over time.
3. Customer acquisition
Customers are the lifeline of your startup, so it’s always a good idea to be laser-focused on some customer metrics. This includes customer acquisition costs (CAC). You calculate CAC by determining an amount of time and then dividing your costs for marketing and sales by the number of new customers gained during that time period. The goal would be to have the lowest CAC you can. Startups should also track customer growth numbers and conversion rates. Advertising spend must translate into returns. So, as a startup, you’ll want to track your return on advertising spending (ROAS).
4. Funding health
One of the main reasons startups fail is they run out of cash. Therefore, metrics that track a startup’s funding health are imperative. One metric every startup should track is their burn-rate—the rate a company is spending its cash or how much cash leaves the company monthly. A fixed burn-rate looks at the company’s operating expenses (rent, salaries, overhead, etc.) while the variable burn-rate (cost of sales, direct costs of goods, etc.) are those expenses that vary each month. The runway is looking at how long a startup has before it will run out of money or when it might break even or generate profits.
5. Customer engagement
It’s important for every startup to define what they mean by “active” users when they are tracking customer engagement. Generally, customer engagement metrics track the number of unique users who engage with a startup’s product. When a startup evaluates customer engagement on a daily and monthly basis, it can be helpful to determine its revenue potential.
It’s certainly cheaper for a startup to retain the business of a customer that’s already been acquired than to market and sell to a brand-new customer. That’s precisely why measuring customer loyalty is important. Startups need to track churn rate, which illustrates how well you retain customers (your churn rate should lower over time). Reviewing retention by cohorts (a group of customers that share a certain characteristic) can also be quite informative. Finally, tracking a Net Promoter Score (NPS) helps you measure customer experience and perception of your brand. It can also help predict growth. NPS asks, “How likely is it that you’d recommend [startup name or product] to a friend or colleague?” You subtract the number of detractors who identified as unhappy customers from the number of promoters (those who are loyal enthusiasts) to determine the NPS.