The definition of a startup company states that it is a company or project undertaken by an entrepreneur to seek, develop and validate a scalable business model. Such newly formed companies, typically, do not have a fully developed business model and, more importantly, they lack adequate capital to grow and expand. They begin their business operations with high costs and limited revenue.
There are many startups that turn to family, friends, and even venture capitalists for seed capital that can be used for market research as well as developing a business plan. As a business is taken off the ground by the entrepreneur, there are many important considerations like deciding on a location, the legal structure of the company, setting up the distribution channel for their product or service, etc. However, continually measuring the performance of the business to ensure that it remains valid, scalable, and relevant tops this list.
What Are Startup KPIs?
Need For Startup KPIs
Important KPIs To Track
What Are Startup KPIs?
Key Performance Indicators, more commonly known as KPIs, are used extensively by businesses to measure their value and success. As true as these are for established businesses, startups fall into a different category in relation to KPIs.
To drive growth that is meaningful and relevant to the target market, startup KPIs are used to identify, evaluate and develop a better strategy that helps to improve operational efficiency. Such KPIs, as related to startups, are the qualitative and quantitative measures that allow them to grow and sustain themselves.
Need For Startup KPIs
KPIs allow startups to better evaluate their business processes, and understand their efforts and the related results. It helps them to concentrate their focus and efforts better on processes that deliver better results through sound business decisions.
- KPIs highlight the right path and direction for the business
- Measuring KPIs allows the startup to identify gaps in the products or services and recognize areas that need improvement
- KPIs are extremely helpful to showcase business results to prospective investors. It shows sincerity and focus as it can help the entrepreneur highlight the YoY business growth projections
Preeti Karna
Important KPIs To Track
Having understood what are startup KPIs and why are they needed; it is equally important to have a clear understanding of exactly what KPIs need to be tracked for a startup.
Addressable Market Size
As the header suggests, this measures the company’s target audience and market size which, then, determines the number of consumers it might attract. What this does is give the startup an idea of its operating budget by determining the marketing needs. This KPI can be measured through conducting market research and communicating with their target audience through various forms of advertisement and social media.
Profit Margin
Undeniably, this is probably the most important KPI to track for a startup. This can be measured by calculating the difference between the cost of manufacturing and the final selling price. This gives an insight into the company’s return on investment and the probable time period in which the company might turn profitable. It also helps in evaluating the company’s long-term sustainability prospects and its growth.
Calculating Monthly Burn
Startups commonly have a negative cash flow in the beginning stages of their business operations due to either higher customer acquisition rates or smaller profits. The monthly burn statement helps them to understand their total debt and the money that they might lose every month in the beginning. Simplistically, monthly burn is calculated as the revenue generated minus the expenditure for inventory and overheads.
Measuring the Runway
This is a KPI that allows the company a clear understanding of the time they have before the cash runs out. Commonly, the runway time for startups is between 12 and 18 months to gain a steady number of customers and become profitable.
Measuring Customer Acquisition Cost (CAC)
Manufacturing cost, marketing cost, and distribution cost, all add up to a final number called the Customer Acquisition Cost (CAC). This is a cost that startups must be aware of and maintain strict vigilance on it. CAC is directly proportional to the growth time of a business.
Rishabh Rathi
Measuring Customer Retention Rate (CRR)
Customer retention is important for the survival of any business, especially startups. Measuring CRR gives a startup a clear idea of how its product is performing in the market. It also helps startups to estimate future sales on a monthly basis and take steps to improve and increase customer retention.
Measuring Customer Lifetime Value (CLV)
This particular business metric allows the business to understand the business a startup may receive from a customer over the course of the company’s lifespan. The higher the customer retention rate of a startup, the higher the customer lifetime value for the company. It helps the startup to determine its growth as well as identify potential sales forecasts.
Measuring CAC Recovery Time
After measuring the CAC, it is also important to measure what will be the time frame in which the startup will begin making a profit from their customer acquisition cost. Measuring the CAC recovery time also helps a startup in gaining insights into the possible net revenue that the company might generate, affecting the organization’s cash flow and financial growth.
Conclusion
Startups are businesses that aim for success through growth and expansion by building a business that is sustainable by driving revenue growth. Hence, their business strategies have to be focused on driving a product that answers a customer need and growing their customer base through customer acquisition and customer retention. Hence, every step taken in a startup business operation must be well thought out and measured so that the path to success becomes clearer and more focused. That can be achieved by measuring KPIs to ensure that the business is growing in the right direction and that the money invested will result in continued and sustained profits over a long period of time.
FAQs
What are startup KPIs?
To drive growth that is meaningful and relevant to the target market, startup KPIs are used to identify, evaluate and develop a better strategy that helps to improve operational efficiency. Such KPIs, as related to startups, are the qualitative and quantitative measures that allow them to grow and sustain themselves.
What KPIs need to be tracked for a startup?
The KPIs that need to be tracked for a startup are:
- Addressable Market Size
- Profit Margin
- Calculating Monthly Burn
- Measuring the Runway
- Measuring Customer Acquisition Cost (CAC)
- Measuring Customer Retention Rate (CRR)
- Measuring Customer Lifetime Value (CLV)
- Measuring CAC Recovery Time
What is Customer Acquisition Cost?
Manufacturing cost, marketing cost, and distribution cost, all add up to a final number called the Customer Acquisition Cost (CAC). This is a cost that startups must be aware of and maintain strict vigilance on it. CAC is directly proportional to the growth time of a business.
