KPI stands for key performance indicators. KPIs indicate how effectively a company is working towards reaching its goals. Founders cannot expect to grow their businesses without having a clear focus on the KPIs of their startups.
KPIs are different from startup metrics. Metrics show the result of a particular activity while KPI determines whether your company is progressing in the right direction to achieve the objectives or not.
Why is a KPI important?
KPIs are vital for the growth of a company. They are a crucial part of accessing the success and failures of your company. KPIs effectively determine the progress of the company and whether it is in the right direction.
Some leading indicator KPIs even predicts the future results of the company. By studying that, you can make the necessary adjustments to achieve your goals. It allows managers to get an outlay of how their individual departments are working at any given time.
Many large companies have numerous KPIs, each for measuring each segment of their business. It helps them analyze whether the team is aligned with the same goals or not. It helps the managers identify the problems faced by different departments and thus, is helping to solve them.
They can also help analyze patterns over time. Without KPIs, your decisions will be based on personal preference and not on data. Thus KPIs are important as they provide an analytical snapshot of the state of the company without being laced with any emotion or feeling.
What makes a good KPI?
Which metrics are important vary from business to business. There are many different KPIs for you to choose from. Chasing irreverent KPIs may shift your focus from what really matters. While just beginning, having only one KPI may be useful.
Four criteria of a good KPI are:
- Related to the product
- Easy to compare
- Must be a rate or ratio
- Clear enough for outsiders to understand.
What are the different types of KPIs?
There are many different types of KPIs. Which one you want to use depends on your long-term goals and the mission you aim to accomplish with your business. Here we’ll discuss a few of the most commonly used KPIs among which you can decide which one you want to use based on your requirements.
- Customer acquisition cost (CAC):
CAC is the average cost spent on sales, marketing, and other expenses to acquire a new customer. It helps you determine whether your expense is too high or you can invest some more in it. The sales and marketing activities that have the least CAC are the most profitable. Thus, this information may be useful for you to optimize and improve your marketing strategy.
How to calculate: Total sales & marketing expenses/number of customers acquired
- Active Users (DAU & MAU):
Daily active users and monthly active users are tracked using this metric. It isn’t helpful to know only the total number of users. Businesses need to know the total number of active users to determine how many users are engaging with their product regularly. You might have 1,000,000 total users but only 10,000 of them who engage regularly.
How to calculate:
you can calculate the DAU by adding up the number of active users in a day. To find MAU ad up the total number of active users in a month.
- Customer lifetime value (LTV):
Customer Lifetime value is an estimate of the revenue a customer brings in over a period of time. Entrepreneurs can compare LTV with the CAC to calculate how much return they are receiving from each customer. This is more useful for mid-stage or late-stage startups that already have a large base of long-term customers.
How to calculate: average monthly revenue per customer × average customer lifetime.
- Gross profit margin (GPM):
Gross profit margin is the difference between revenue and the cost of goods sold (COGS). By taking a look at the gross profit margin you can identify the high-profit products that you should promote more. It also shows whether your COGS is too high.
How to calculate: (Total revenue – Cost of goods sold)/ total revenue ×100
- Lead velocity rate (LVR):
LVR is the growth of leads in the sales pipeline. Dividing the total number disclosed by the number of leaves gives you an idea of qualified leads to become customers. It helps you measure the success of your marketing and sales team.
How to calculate:
[No. qualified leads this month – No. qualified leads last month] / No. qualified leads last month] X 100 = Lead Velocity Rate (%)
- Revenue growth rate (RGR):
RGR measures the percentage growth of your revenue over a certain period of time. It indicates how quickly your startup is growing. It also demonstrates by what amount the demand of your product is growing in the market.
How to calculate:[[Revenue this month – Revenue last month] / Revenue last month] X 100 = Revenue Growth Rate (%)
- Activation rate:
The activation rate tracks the percentage of people who complete a specific milestone in your onboarding process. A low activation rate makes sure that your onboarding process is difficult and it needs to be changed. It also shows that you might be at tracking low-quality leads who are not actually interested in your product.
How to calculate:[Total users who complete the set milestone / Total users who signed up or activated the service ] X 100 = Activation rate (%)
Setting and tracking the right KPIs is an important step toward the success of a startup. It helps analyze how your startup is performing and where improvement is required. KPIs help make data-driven decisions which are essential in the overall growth of a startup.
Do Share Your Thoughts:
Do tell us all your thoughts in the comments section below, we look forward to reading all the comments in the section below.
- How to validate your startup idea?
- What is founder vesting and how does it work?
- Why do you need a Co-founder for your Startup?
- How to look for the right startup idea?
- What is Pitch Deck and how to create one?
- What should failed startup founders do next?
- Everything you need to know about MVP, Alpha, and Beta?
- What is Angel financing and how does it work?