How to Set and Measure KPIs for Your Startup

What are KPIs

Key performance indicators (KPIs) are metrics that gauge the effectiveness of your business in achieving its objectives. They are closely tied to specific, attainable business goals. Essentially, while your goals represent the desired outcomes for your business, KPIs serve as the yardstick for measuring progress towards these goals. Typically, startups start with three core goals and assign one to four KPIs per goal to track their progress effectively.

Why is tracking your KPIs important?

Monitoring and evaluating KPIs is of paramount importance for startups. It facilitates the tracking of progress and provides a clearer understanding of whether current strategies are yielding the desired outcomes.

In the absence of KPI tracking, decision-making processes would be predominantly influenced by intuition or personal bias, rather than empirical data. KPIs empower startups to make strategic, data-driven decisions, fostering growth and steering the business towards its objectives in a more informed manner.

How to Set and Measure KPIs for Your Startup?

Choosing industry-specific KPIs involves a six-step process:

Define your objectives: Determine your primary business goals, such as increasing revenue, reducing costs, or enhancing customer satisfaction.

Identify Critical Success Factors (CSFs): These are the key actions needed to achieve your goals and can vary based on your industry. For instance, if your goal is to boost revenue, CSFs might include increasing sales or retaining customers.

Select KPIs for each CSF: For example, if you’re in ecommerce and your CSF is to sell more products, your KPIs could be monthly revenue, conversion rate, or average order size.

Simplicity is key: Avoid choosing too many KPIs. Select only the most crucial metrics for tracking progress.

Regularly review and adjust your KPIs: This ensures you’re on track to meet your business goals and adapt to changes in your industry.

Benchmark against others: Consider the performance measures used by competitors and successful businesses in your industry.

Here are some common KPIs for startups:

Monthly Recurring Revenue (MRR): This is the recurring revenue generated monthly. For a Software as a Service (SaaS) business, a general guideline suggests that a minimum MRR of 30k is required for investors to consider a Series A round of investment.

Annual Recurring Revenue (ARR): This is the recurring revenue generated annually. Both MRR and ARR are valuable metrics as they provide insights into revenue predictability, thereby reducing investment risk.

Gross Profit: This is the total revenue minus the cost of goods sold. It’s a key financial KPI and an essential component of your startup’s Income Statement.

Lifetime Value (LTV): This predicts the net profit from the entire future relationship with a customer. It’s typically calculated by multiplying the average margin per sale by the purchase frequency per client in a given time period, and then by the number of periods you expect the client to continue purchasing your services.

Customer Acquisition Cost (CAC): This represents the average cost to acquire a customer. It’s advisable to explore different acquisition channels and maintain a balanced set of options to avoid dependence on a single channel.

Customer Concentration Risk (CCR): This is calculated by dividing the revenue from your largest customer by the total revenue. It provides an understanding of how much your revenues depend on your biggest client — ideally, one client shouldn’t represent the majority of your revenue as that poses a higher risk for your investment.

Monthly Cash Burn Rate: This is the rate at which a company is losing money, typically measured monthly. It’s calculated by dividing available cash by monthly operating expenses (gross) or monthly operating losses (net).

Total Addressable Market (TAM): Also known as total available market, TAM represents the total potential revenue opportunity for a product. It’s calculated in potential annual revenue or unit sales if 100% of the available market is achieved.

Gross Margin: This is the difference between revenue and the cost of goods sold. Understanding these terms is crucial when making financial projections for a startup.

Conclusion

In summary, KPIs are essential metrics that enable startups to set clear targets, measure progress, and make data-driven decisions. Following a process of goal-setting, determining critical success factors, selecting simplified but relevant KPIs, regularly reviewing, and benchmarking is key. Core financial KPIs like MRR, ARR, gross profit, LTV, CAC, and cash burn rate are especially important. Tracking the right performance indicators empowers startups to steer their business more effectively towards their goals and desired outcomes.