Key Performance Indicators (KPIs) can be powerful indicators of progress toward a predefined objective. “What gets measured, gets done,” said Peter Drucker, the legendary management consultant and Presidential Medal of Freedom recipient, celebrated by BusinessWeek magazine as “the man who invented management.” His mantra still holds true today. Performance metrics and KPI tracking are effective ways of paying attention to your company’s most impactful activities.
KPI: Missteps and Strengths
Fortunately or unfortunately, there are endless KPIs for whatever you’re seeking to improve. According to Ted Jackson, Founder of ClearPoint Strategy, there are two common missteps made during the selection process.
Choosing KPIs you’ve always measured
Measuring KPIs you’ve always measured may not take into account any changes in your customer’s behavior that could help your company grow.
Choosing KPIs that are easiest to measure
Basing your choice on simplicity rather than strategy won’t, in most cases, help you accomplish anything. Assess every KPI based on its relationship to your overall goals. For example, are you measuring the number of customers you get each day because that KPI will help you achieve a strategic goal? Or, simply, because it’s easy to track?
Strong and effective KPIs will:
- Provide objective evidence of progress towards achieving your desired result.
- Measure what is intended to help you make more informed, higher-quality decisions.
- Offer a comparison that gauges your team’s degree of performance change over time.
- Track effectiveness, efficiency, quality, timeliness, compliance, governance, behaviors, financial or project performance, personnel or resource utilization.
- Help you differentiate between leading and lagging indicators.
Here are 10 important KPIs divided into two primary categories: Financial KPIs, and Marketing and Scaling KPIs.
Even if you’re new to KPIs, most likely you’re tracking profit. Don’t forget to analyze both gross (your organization’s profits earned after subtracting the costs of producing and distributing your products) and net profit (your company’s profit after all of its expenses have been deducted from your revenues) margins to better understand how successful your organization is at generating a high return.
2. Cash flow
This KPI measures your costs versus revenue as it captures money going in and out of your business. The goal is to gain more liquidity by generating positive or free cash flow with more money flowing into your business than out of it.
This is the fuel that powers your startup’s engine. It’s generated through sales and is a widely measured KPI. Keep in mind that in most cases it can be misleading because it doesn’t take into account your business expenses. That’s why it shouldn’t be a stand-alone KPI and should be used in conjunction with other financial metrics.
4. Net income
Your net income is the difference between your revenue and expenses. Pay close attention to your Customer’s Lifetime Value, Customer Acquisition Cost, Churn Rate, Cash Flow and Burn Rate to help you optimize the difference between your revenue and expenses.
5. Burn rate
This is an important KPI because it helps forecast how long your success runway is. Another way of looking at it is that your burn rate is the rate at which your cash is decreasing. This metric is especially important if you’re a pre-revenue startup or venture capital-backed. It’s critical to closely monitor your burn rate because most companies fail when they are running out of cash and don’t have enough time to raise funds or reduce expenses.
- Monthly Cash Burn. Your cash balance at the beginning of the year less your cash balance by the end of the year, divided by 12.
- Gross Burn. Looks only at your monthly expenses plus any other cash outlays.
- Net Burn. Revenues including all incoming cash you have a high-probability of receiving less gross burn is the true measure of cash your company is burning every month.
Marketing and Scaling KPIs
6. Return on Investment
Your ROI is an important metric of how effectively your startup deploys capital. To calculate your return on investment on your marketing spend, divide your profits or losses by your total investment and multiply the result by 100 to get the ROI in percent.
7. LTV:CAC ratio
This useful KPI combines two popular metrics — LTV (Lifetime Value) and CAC (Customer Acquisition Cost) — to make it more digestible. In general, a strong LTV to CAC ratio is 3:1. If you can acquire a new customer for $100, their lifetime value should be at least $300. Conversely, if your ratio is 1:1, you aren’t making any money on new customers and will likely run out of liquidity.
- Lifetime Value. Calculate LTV by multiplying the average purchase value by the purchase frequency. This becomes your average customer value. Multiply the average customer value by the average period (months or years) that the customer is retained.
- Customer Acquisition Cost. This tells you how much money you spent to acquire your customer. In the beginning, it’s common to have a high CAC, but as you refine who your apex customer is and improve overall processes your CAC should decline. CAC includes your expenditure on sales, marketing and distribution activities.
8. Website traffic
Every startup has a website today. You’ll need to understand where your website traffic is coming from. These sources are often grouped into organic, paid, social, referral and direct traffic. Knowing where your traffic comes from will help inform your decisions for where to spend your time and budget.
9. Net Promoter Score
NPS is used to gauge the loyalty of your customers. It is used by hundreds of Fortune 500 companies, including Microsoft, GE and American Express. These are often determined with surveys, with scores of 1 to 10 usually with a question of “How likely are you to recommend your X to your friend or colleague?”
- X could be your company, product, event or customer support experience, etc.
- If the answer is 1 to 6 they are considered a detractor and are at risk of customer churn.
- If the answer is 7 to 8 they are considered passive.
- If the answer is 9 to 10 they are considered promoters.
- To get your NPS, take % Promoters less % Detractors. This creates a scale ranging from -100 to 100. 0 to 49 is considered Good, 50 to 70 is Excellent, and 70+ is World Class.
- NPS was created by Frederick Reichheld and a team from Bain & Company, he claimed NPS is “the best predictor of growth” for a business.
10. Employee satisfaction
Happier employees are more productive, work harder and propel your company further, faster. Measuring your employee satisfaction through surveys and other metrics is vital to your company’s health and culture.
Things to keep in mind about Key Performance Indicators:
- KPIs can easily be faked. KPIs are not generally questioned and numbers stand as they are presented. Verify their authenticity before making critical decisions.
- KPIs may oversimplify complex issues. One number (KPI) may not always aggregate all the information you need to make informed decisions. Consequently, it’s critical to look at a set of KPIs and to consider their standalone deficiencies.
KPIs are effective tools to determine the health of your business at any given time. And, efficient at identifying any glaring weaknesses. Use your custom set of KPIs in tandem with your scaling strategic partners to optimize your startup’s effectiveness and reach.
Marty Aquino has been a passionate writer on venture capital, technology, forecasting, risk mitigation, wealth and entrepreneurial topics since 2009. He is the founder of Carbonwolf Energy, a venture-capital firm specializing in world-changing and status-quo-defying technologies and people.
Drucker Institute – About Peter Drucker
ClearPoint Strategy – What Is A KPI? (A Definition, & 3 Questions Answered)
Andreessen Horowitz – 16 Startup Metrics – Andreessen Horowitz
Independent Banker – How happy employees can drive success
Harvard Business Review – The One Number You Need to Grow