Have you ever thought about what sets a good start-up apart from a great start-up? Well, the difference starts with the ways of working of the business in a start-up. It is true that a performance management system should be in place for an individual in an organisation so is it for the organisation itself irrespective of the fact that the organisation is large or small. In the context of a start-up, the progress of performance of the start-ups shall be measured and tracked by the KPIs that must be set at its early stage. The ‘measurement of outcomes of activities performed’ in a start-up is very important. The ability to analyse and understand the performance indicators of a start-up shall define the success of the start-up. Also, it will play a crucial role in converting a good start-up into a great one.
KPIs: Full form & Meaning
KPIs is abbreviated for Key Performance Indicators. Key Performance Indicators (KPIs), Key Success Indicators (KSIs), Business Metrics or Key Business Performance Metrics, these terms are used interchangeably and they serve the same role i.e. to track and measure the overall health and performance of a company.
The ability to analyse and understand the performance indicators of a start-up shall define the success of the start-up. And, it will play a crucial role in converting a good start-up into a great one.
KPIs: What is their role and why are they required?
KPIs help to identify problem areas and measure the performance of the business. KPIs constructed well, provide management and potential investors an analytical snapshot of the state or we can see the overall condition of the company.
KPIs track the revenue (average profit, total revenue and new customer revenue), employment statistics (i.e. employee turnover and employee performance), marketing effectiveness like sales generation, efficiency and performance of an individual (employee or his/her manager), processes/departments and therefore performance of the company as a whole.
KPIs vs KRAs
Read the abbreviations aloud! And, yes, read them again. People often get confused between these two terms: KPIs (Key Performance Indicators) and KRAs (Key Responsibility or Result Areas). Both KPIs and KRAs measure and track the performance of the business. However, they both are different and yet important. They are different approaches to meet the business goals and objectives.
KPIs work like a compass. They keep a track of the business if it is headed in the right direction or not.
How do you identify the KPIs that are relevant for your start-up?
Here are the key stages or steps to identify or choose the right or correct KPIs for a start-up business:
- Select and review the KPIs that align and directly contribute to the business objectives
- The selected KPIs shall meet the criteria of a good KPI. Ask yourself the below questions and, If the answer to most of the questions is ‘No’, you may need to change or replace these with new and more relevant KPIs:
- If the chosen KPIs can be easily quantified?
- Will they drive the change you want to see?
- Are the KPIs achievable, actionable? Could they be measured in a timely and accurate manner?
- Do these KPIs contribute to different prospects like customer, financial, internal process, learning and growth?
- Will these KPIs be relevant in the future?
- Set short and long term KPIs
- Share the KPI with the stakeholders and assign the responsibility for each KPI
- Analyse and Evaluate current performance
- Review of KPIs on periodic intervals i.e. may be weekly, monthly or quarterly basis
After reviewing the progress, you may need to evolve the KPIs. Hence, keep a flexible approach to review and readjust the KPIs if needed.
KPIs: What are the types and list of KPIs in a start-up?
Different areas or departments in a business such as sales, customer retention, cost of customer acquisition, cash flow, conversation rate, employee engagement, employee satisfaction, profit margin, website traffic, employee productivity, inventory Size can be analyzed by various kinds of KPIs. However, depending on the type of business, KPIs selection in a start-up may be different. Let us take a look at some of the key metrics or KPIs in a start-up business:
Active Users or Monthly Active Users (MAU)
Companies with apps and online games or social networking sites, use Monthly Active Users as a KPI to count the number of unique users who visit their company website on a monthly basis. Websites recognise MAU by identifying users’ contact number, email address and username.
Customer Churn Rate (CCR)
CCR means percentage of customers lost during a given or specific period i.e. they have stopped making purchases or unsubscribed from company services. Low churn means current customers are happy and believe that the product provided by the company is solving a problem. For SaaS or mobile Apps, a churned customer is one who cancels their subscription. And for e-commerce, churn rate means customers who fail or do-not make a repeat purchase within an average time frame. That period may vary from 90-120 days.
Customer Lifetime Value or Lifetime Value (LTV)
LTV represents the total revenue or an estimate of the revenue a customer will bring in or spend in your business or on your product or services during their lifetime.
Customer Acquisition Cost (CAC)
With CAC, a start-up can gauge how much they are spending on acquiring each customer. It reflects the money spent on marketing and salaries. CAC and LTV combination is frequently used to compare metrics particularly for SaaS companies.
Gross Merchandise volume (GMV)
GMV is the term used in online retailing business. It denotes the total monetary value of the sales for the merchandise sold through a specific marketplace over a certain period of time.
Gross Profit Margin (GPM)
GPM is the percentage of revenue that is actual profit before adjusting the operating cost such as marketing, overhead and salaries. GPM is determined by revenue and cost of goods sold (COGS).
First Time Response (FRT)
FTR is the difference between the time elapsed between a customer raising a ticket for a service or an issue/problem and an agent’s or customer support staff’s first response to it. Mostly average first response time is measured in business hours unless the customer support is open 24/7.
Revenue Churn Rate (RCR)
RCR is the percentage of the revenue lost in a given period of time due to cancellation or any downgrades. SaaS companies measure this KPI as monthly recurring revenue (MMR) churn.
Monthly Recurring Revenue (MRR)
MRR is one of the most important KPIs for a company that is selling subscriptions. Every new customer addition means a certain amount of money a company will earn every month provided the customer stays as a client. This metrics shows the profitability of a company as well as predicts the expected revenue for the following month.
Revenue Growth Rate
Revenue growth rate measures the month-over-month percentage increase in revenue. It indicates how quickly a start-up is growing.
Conversion Rate measures the success of any marketing campaign. Conversion rate calculates the percentage of the number of visitors who take a desired action or complete a goal on your company website. The higher conversion rate reflects the successful marketing campaigns.
Lead Conversion Rate – This is one of the most important top-of-the-funnel conversion metrics. Lead conversion rate is the percentage of visitors who arrive at the company website and are captured as ‘leads’. It indicates the ability of an organisation to attract the right target audience.
Activation Rate – It measures the percentage of people who successfully complete a definite milestone in the company’s on-boarding process. A milestone may vary as per the company business. For instance, a social platform may track the percentage of users who add the first friend in their friend list. Similarly, a music-streaming application may track the number of users creating their first playlist.
Average Revenue Per User or Average Revenue Per Unit (ARPU)
ARPU measures the revenue generated per user/customer or per unit. The term is mostly used by companies that offer subscription services to clients. For instance, internet service providers or telephone service providers.
KPIs work like a compass. They keep a track of the business if it is headed in the right direction or not. What works for a start-up and what doesn’t, can be clearly indicated by tracking the KPIs regularly to avoid repeated mistakes in any business. Key Performance Indicators (KPIs) or Business Metrics as stated above could be classified in various categories such as People Metrics, Customer Metrics and Financial Metrics. However, all these metrics shall comfort the start-ups to know the cause of poor performance, failure, success and results of the action performed and know the improvement areas.
The stated business metrics or KPIs are useful for start-ups in its various stages. However, to be a successful entrepreneur it is vital to narrow down to choose the right KPIs and prioritize them as per the need/growth of the company. Keep it very simple to select the KPIs i.e. make it easy to understand the performance indicators and choose SMART Key Performance Indicators i.e. KPIs that are specific, measurable, attainable/achievable, realistic and time-bound.