If you own an organization, business, or startup, you need to know how to reach your goals and profits. If you’re part of a startup company, learning about key performance indicators may help you measure goals and advance your workplace’s growth. So first, learning about key performance indicators is a must.
What Are Key Performance Indicators?
Key performance indicators are values that companies can use to measure their growth and determine areas of improvement within their operations. Organizations use KPIs (Key Performance Indicators) to help individuals at all levels focus their work toward achieving a common goal. KPIs also help businesses understand whether they’re utilizing their time, budget, and talent on the right strategies, tasks, and tools to achieve their goals. Key performance indicators also allow companies to gauge their success and estimate their future financial health.
There are two types of KPIs that are commonly used, and each has its role.
- Lagging vs Leading KPIs
- High vs Low KPIs
Why Are Key Performance Indicators Important for a Startup?
Here are some reasons startup businesses need to use key performance indicators:
- Show Growth
- Give investors insight into sales potential
A good KPI should have the following qualities :
It should be a detailed, simple, clear description of your goal.
KPIs should be quantifiable.
Regularly examining your KPIs is a great way to ensure you’re still working toward the right objectives.
Helps set realistic expectations with stakeholders and company leadership.
Key Performance Indicators for Startup
Here are 8 key performance indicators for a startup :
1. Customer Acquisition Cost
Customer acquisition cost is the cost that a startup company has to pay to acquire a customer. For instance, a startup company may have to undertake certain marketing activities or offer specific freebies to prospective customers to induce them to try the product. A lot of the time, startups sell their products at a deeply discounted rate to get positive word-of-mouth going for the product. The customer acquisition cost is one of the metrics which allow the startup to gauge the efficiency of its marketing programs.
2. Customer Lifetime Value
The customer lifetime value is an important concept that needs to be understood about customer acquisition cost. One-time acquisition of a customer can lead to recurring financial benefits in the future for the startup firm. Hence, the ratio between the customer acquisition cost and the lifetime value is critical. It helps investors understand how profitable the company will be in the long run.
3. Customer Retention Rate
The acquisition of customers is just one part of the story. The company loses money when they first acquire the customer. The company makes money when it can retain customers for a long time and sell them products and services. Investors prefer companies with a high retention rate because the customers have tested the product over time and believe that the company is giving the best value for money over the years.
4. Recovery Time
Recovery time is the time the startup company will take to recover the initial customer acquisition cost. It needs to be understood that a short recovery time is highly desirable because as the period increases, it becomes unlikely that the company will be able to retain the customer and hence may not be able to recoup its initial investment. Recovery time is one of those metrics keenly observed by the investor community.
5. Average Active Users
A high number of average active users over a sustained period tells the investor that the application provides a good value proposition compared to its competitors. Hence, startups with many active users tend to receive a higher valuation than their counterparts.
6. Gross Merchandise Value
Many startup companies sell products with a very high value for a small margin. For instance, e-commerce portals such as Amazon earn a relatively small portion of the sale price as revenue. Hence, looking at the revenue for such companies distorts the situation from an investor’s point of view. Therefore, investors tend to look at the gross merchandise value of the goods and services sold. Companies with higher gross merchandise value tend to receive higher valuations even though they may have lower revenue than their peers.
7. Conversion R
Since customer acquisition rate is the predictor of profitability, this metric convinces investors to provide a significantly large valuation to the startup firm. The conversion rate is another important indicator for the investor community. The conversion rate measures the number of customers obtained and customers contacted. So, let’s learn deeper about KPI
8. Overhead Ratio
Overhead can be very dangerous for a startup business. This is because overheads are payable regardless of whether there are any sales. Startup companies should try to keep their overheads at a minimum level. The focus for these companies should be minimizing overheads even if it costs them more in the short run. Startup companies in which overheads form a small part of monthly expenses are considered more efficient and resilient. This is why startup companies tend to obtain higher valuations than their less creative counterparts.
How To Create KPIs?
- Determine your end goal
- Ask key performance questions
For instance :
What result do I want to achieve?
Why is that outcome important?
How can I define progress?
How can I affect the result?
How will I know I’ve reached my end goal?
- Identify what information you already have
- Collect supporting data
- Set short and long-term goals for the KPIs
- Share KPIs with appropriate leadership and stakeholders.
Make A Report of KPIs
- Goal: Identity which objective the KPI is evaluating.
- Metric: State the quantifiable, relevant and actionable key performance indicator you’re using for measurement purposes
- Rationale: Explain why you or your team chose this KPI and how the resulting data contributes to the company’s success.
- Frequency: State how often you measured your key performance indicator and at what frequency you’ll re-examine it.
- Source: Identify where you gathered the data and consider sharing a formula for calculating the data.
- Visuals: Use a chart, table or graph for easy comprehension. If applicable, compare it with previous visuals of the same type to track progress over time.
- Comments: Here, you can briefly add any other relevant information or interpretation of the metrics you obtained.
Difference Between KPI’s
Key Performance Indicators vs Objective and Key Result :
- They flow through the organization in different directions.
- OKRs are more transparent.
- The bar for OKRs is usually higher than KPIs.
- OKRs shouldn’t be used in performance reviews.
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- 50 weeks brainstorming session
- Dedicated one-on-one attention (the gear up team will help create a 1 year plan, and track KPIs from clients regularly)
- Join a community of passionate entrepreneurs
- 1 year access to our events
- Discussion with our investment team for the first 20 Registrants
- Unlimited access to learning materials