Measuring KPIs that matter
Most startups, especially at the beginning, fail to pay attention to KPIs. As I explain in this article, that’s a mistake. Measuring your KPIs, especially the KPIs that matter, is critical for the success of your startup later, even if you don’t think it’s relevant at the beginning.
There are thousands of books devoted to what is and what is not a KPI, how to measure them, and complex algorithmic formulas to calculate them. Following the Pareto’s Principle, I won’t go into any of this bullshit, but show you the most common KPIs most startups out there need to measure, why they are important, and some basic principles to calculate them.
What’s a KPI?
Ok, KPI stands for Key Performance Indicators. They are quantitative success metrics (i.e: you can measure them numerically) that track business goals (i.e: they track a relevant metric). KPIs are strategic in nature (i.e: their goal is to help you make decisions) and cover a large enough period of time (usually a month, quarter, or year). One example can be the revenue of the company every quarter. We will go through the most common ones below.
What KPIs should you measure?
There is no single answer to this question. Different startups have different needs. I will divide them into three groups: common KPIs that most startups want to measure, optional KPIs, and specific KPIs that may depend on your business. These latter ones are, in my opinion, the KPIs that matter.
Even though most KPIs in the “Common KPIs” section are relevant to most startups (and most investors/VC firms will ask about them), you should not blindly measure everything. Measure the stuff that allows you to track the growth of the business and make educated decisions.
The specific KPIs are the ones that vary from startup to startup, and thus are the ones that offer more value and better insights on the strategic evolution of the business, how it is disrupting a market or process, or deploying a new innovative technology effectively.
Common KPIs for startups
I’ll start with the basics. Some of these values may seem obvious to you, while others not so much.
The total number of money earned during a period of time (usually a month or a year). The revenue includes all money that enters the company, including monthly recurring revenue and one-off payments for extra services, interest, return of investments, etc.
MRR (Monthly Recurring Revenue)
The Monthly Recurring Revenue (MRR) is the predictable revenue generated by your business from all the active subscriptions in a particular month. Usually, only subscriptions for active users are taken into account in MRR, not one-off payments or extra services.
For example, if the total revenue of your company in April was 3M €, but only 2.75M € was due to active user subscriptions, and the rest was due to other (nonrecurring) revenue sources, the MRR of your business is 2.75M €.
MRR Growth (percentage)
MRR Growth percentage: the increase in MRR every period (usually monthly) compared to the previous one. For example, if the MRR in March 2022 was 50,000€ and the revenue in April was 55,000€, the MRR growth percentage is (1 – (55,000/50,000))x100 = 10%. This is one of the most important standard KPIs for any startup.
All the money spent by the business. This includes all expenditures, from contractors, employees, and services and goods acquired to any other expenses (like interest paid on debt). Usually, expenses are divided into at least these three categories:
- Marketing expenses: The expenses incurred by the marketing department. Depending on who you ask, these may or not include the cost of employees. Here it is supposed that they don’t include the cost of employees or contractors, only the direct marketing acquisition and service expenses (campaigns, adwords, advertising, social media, and tools used among others).
- Employee expenses: The expenses incurred by employees, usually in the form of salaries and associated taxes (social taxes, etc). Note: contractor’s work is not included in this category, as contractors are not considered employees in accounting terms.
- Other operational expenses: other expenditures incurred in the operation of the company. This category includes services used by the company (such as monthly subscriptions, software licenses, etc), and also contractor’s work, among other things.
The gross profit of a business in a certain period is the difference between the revenue of the company in that period (usually a month or a year) and the costs of running the business (referred usually as COGS, or cost of goods sold).
These costs include raw materials and inventory used, employees and their salaries, contractors and their fees, costs of equipment, office expenses and utilities, and shipping costs. If the company had 90,000€ in revenue in April, and the sum of marketing, employee, and other operational expenses is 70,000€, the gross profit is 20,000€.
This can also be expressed as a percentage, in this case (gross profit / total revenue)x100. In this example, it is (20,000/90,000)x100 = 22,22%.
The net profit is similar to the gross profit but takes into account every possible source of expenses for the company, including taxes paid, income tax, dividend taxes, etc.
In the previous example, if the company had to pay 10,000€ in taxes during that period (income tax and other related taxes), the net profit would be 10,000€. It is a better way of calculating the real profitability of the company.
This can also be expressed as a percentage, in this case (net profit / total revenue)x100. In this example, it is (10,000/90,000)x100 = 11,11%.
The net amount of money that the business has in cash. This is a way of knowing the liquidity of the company (how much money it has to pay for its debt and liabilities).
Cash Burn Rate
For non-profitable startups, before breaking even, this value measures how long you can survive. It is the division between the net cash and the total sum of the expenses of the business (supposing no more money gets in).
It is an important value for funded startups to know how much money they have left before they need to get a new round of investment (or reach the break-even point and become profitable).
This number measures the new users acquired during a certain period of time. Note that these users are not necessarily paying for your services. As such, other KPIs (like new customers or active customers) may be more relevant from a financial point of view. Still, the number of users is relevant, especially for consumer products and services, and especially if your startup wants to fundraise.
New (Paid) customers
For subscription business models and SaaS startups, this value measures the new customers acquired during a certain period. A customer is a user that pays for your services.
Depending on the onboarding process of your business or trial periods, these customers may need some time before their subscriptions are active. Until then, they are not considered part of your MRR. If their account activation requires the payment of a one-off fee, this still does not count as MRR.
The ratio of customers with active paid subscriptions divided by the total number of users of your platform (including customers with active paid subscriptions, customers in trials/onboarding not paying yet, and non-paying users).
This ratio is important because it allows you to understand how much of our user base is paying for our subscription fees and generating MRR. For example, if you have 1000 users, but only 200 of them are paying customers, your ratio of active customers is 20%.
For startups that differentiate between non-paid users and paid customers, increasing this number is usually a strategic goal.
A churn indicates a customer that stops being a customer. Usually, there are two ways of expressing the Churn rate of your company, either as an absolute number (number of churns per month) or a percentage (% Churn rate, calculated as the churn number during one month divided by the total customers during that period).
Average Yearly Churn Rate
The percentage of churns during the whole year. It is the total number of churns during that year divided by the total customers at the end of the year.
Monthly website visitors
Unique visits from people to your website. This number includes only unique visitors, so if 1 person visits your website 3 times during the month and sees 4 or 5 pages on every visit, we will only count 1 visit for this visitor for the whole month. This data usually comes from Analytics.
The amount of traffic (visitors) that comes to your website organically, meaning, visits that are not paid or referred by others but come from searching on Google (or another search engine) and finding a non-paid result from you. Organic traffic always means a good job at positioning your website.
It’s an important KPI because it’s bringing you traffic, users, and customers “for free”. I dare to affirm that in order to succeed, a startup needs to build solid organic traffic pointing to its website.
The ARPPU (Average revenue per paying user) is the revenue you get every month, on average, per customer. Depending on the tiers or services used, different customers pay different fees. ARPPU can be improved by increasing your fees, adding upsales, or offering extra services to your current clients.
If you have 1000 active customers, and the ARPPU is 81€, we can expect to receive 81,000€ per month. Usually, this number is calculated based on the MRR and number of customers (i.e: you had 81,000€ in MRR and 1000 customers, so your ARPPU is 81€).
CAC (Cost of acquisition per customer) measures how much money you need to pay to acquire a new customer. This is a marketing metric. It is the sum of all marketing costs divided by the number of new customers during that period.
For example, if you spent 5000€ in marketing in March (including AdWords, marketing campaigns, social media, cost of marketing contractors, etc), and got 25 new customers, your CAC was 5000/25 = 200€. That means every customer costs you 200€, so you better get at least 200€ from them if you want to be profitable!
LTV (lifetime value) is the total amount of money, on average, that a customer will pay you for your services since they become your customer until they stop paying for your services. This value depends on the average money you get from each customer every month and your churn rate (the higher the churns, the lower your LTV, as your customers stop being customers sooner in statistical terms).
The formula is ARPPU x (1/monthly churn rate). So if you get on average 60€ per customer, and your monthly churn rate is 1.2%, your LTV is 60 x (1/0,012), which is 5,000€. That’s it, on average, every customer gives you a total of 5000€.
This value allows you to easily check if your company is profitable. Intuitively, the LTV of a customer should be higher than the cost of acquiring it (CAC).
In our previous example, if your CAC is 200, and your LTV is 5000, this ratio is 25. It means you get, on average, twenty-five times more money from a customer than it costs you to acquire one. An LTV/CAC ratio below 1 means your business is not profitable. A ratio of at least 3 is considered “healthy”.
Other Optional KPIs
Other KPIs, while not specific to your startups, will not be relevant for all businesses.
For consumer SaaS startups offering “free” services or those with B2C business models where the source of revenue is not the user (think Facebook and money from advertisement companies), it does not make sense to differentiate between users and customers (because none of your users pay for your services).
In that case, it may be much more relevant to measure the number of active users, i.e: those who regularly log in and engage in the platform, consume its content, or interact with other users. The meaning of “regularly” here will vary from startup to startup. It can be one week or even one day.
Startups with this business model may also want to measure revenue from the real source of income, such as advertising companies. That revenue may fall into the MRR category described above if it is regular and subject to a subscription.
Another example is referrals. If you have a referral program, you may want to measure how your current customers are bringing new clients through it. This will also indicate how happy they are with your services.
There are many other KPIs that may be relevant to your business. If your company has a Customer Support team, you may want to measure the number of tickets answered and solved every month or the average time answering or solving them.
If you have a video-conversion service, you may want to measure the average conversion time per video minute, the number of videos converted every month, or the number of formats supported. Some of them will be the KPIs that really matter to your business, as we are going to see next.
The KPIs that matter to your business
Each startup is trying to solve a very specific problem. As such, there are KPIs that will be specific to your business and will not make sense to others. These KPIs, while not as relevant perhaps for investors or venture capital firms, are much more valuable to you and your team.
Imagine that your business is a SaaS platform that helps doctors diagnose common illnesses from customers using ML. If the algorithm has total certainty of a diagnosis, it will automatically communicate it and suggest a treatment.
If there’s an unacceptable margin of error (say, 1% or more), it will consult the doctor. Whatever the case, on a follow-up with the patient, the doctor will always assess the accuracy of the algorithm’s decision.
In this scenario, there may be two interesting KPIs that are specific to this startup. The obvious one will be the percentage of automatic diagnoses that didn’t require intervention from the doctor and where later found correct. Another, less obvious, but perhaps much more revealing, would be the number of patients a doctor can assist every month.
Finding the hidden KPIs
Both are indeed closely related. The more accurate the algorithm, the less time will be spent by doctors on simple diagnoses and, as a result, fewer doctors will be able to assist more patients, reducing operational expenses.
This latter KPI, while less analytical in nature, is much more understandable in human terms (going from 500 patients per doctor to 750 patients per doctor a month is much easier to understand and makes better headlines than “our algorithm has increased its accuracy by 27.58%”.
While both values are telling a similar story, the second one gives you a better hint at scalability and reducing expenses that an accuracy algorithm, and allows you to make better decisions based on data.
Unfortunately, there’s no easy way to find those “hidden” KPIs that matter to your business. It may be hard to find them at the beginning, but eventually, they will reveal themselves. You just need to pay attention and keep an open mind.
Consider the example of Airbnb. In the beginning, when they were struggling to grow, they tried a novel idea: hiring photographers to offer professional photography of the apartments of their hosts for free. They discovered that the increase in professional photoshoots was directly related to the nights booked on their platform.
Measuring these KPIs
I wrote a twin article on how to measure these KPIs. I would recommend you to start measuring them right away, from the first day your startup is born. If you are not doing it already, get down to business today!