What Is a KPI?
A key performance indicator (KPI) is a data point your startup can track to determine performance over time and quantify how close or how far your team(s) are from meeting business objectives. Typically, KPIs are smaller inputs that feed into a larger business goal.
What Is a SMART KPI?
You’ve likely heard of SMART goals in the past, where SMART is simply an acronym for “specific, measurable, attainable, relevant, and time-bound.”
Since key performance indicators are essentially “business goals,” you can apply the SMART formula to your startup’s key performance indicators to ensure you’re tracking what’s actually relevant to your business instead of vanity metrics.
A SMART KPI will have a specific outcome, as well as a defined, measurable quantity that determines success or failure. It shouldn’t be out of reach of your team (attainable), and it should be relevant to the business objectives you’re attempting to reach. Finally, SMART KPIs have a specific time period over which they’re measured, such as “month over month revenue,” to state an example.
Why Are KPIs Important for Startups?
KPIs are critically important for startups because they give you the information you need to course-correct early and ensure you’re on track to meet your business goals.
Startups can be fragile in their beginning stages of growth, where one big mistake can derail months of effort and set everyone behind.
By tracking key performance indicators consistently, startups don’t have to worry about “flying blind” as they can see the entire landscape around them and where they’re headed.
Types of KPIs
There are several different types of KPIs startups can track to make sure they’re on the right path and not deviating from their objectives. Key performance indicators can be quantitative, qualitative, leading, or lagging. They can also be an input, output, or specific process that teams follow and measure over time.
Quantitative KPIs are distinctly measurable and involve hard numbers. This is the most common type of KPI that counts specific tasks or objectives completed.
Qualitative KPIs focus on the descriptive qualities of a startup rather than numbers. These indicators tend to be more subjective, such as customer satisfaction surveys.
A leading KPI will determine a future outcome or result and can be used to predict trends or changes in a startup that will occur in the future.
Lagging KPIs tell you what has already occurred in your startup over a certain time period, such as profit or revenue.
An input KPI is related to a certain resource or task that contributes to additional value being created for your startup in the future.
An output KPI measures the goods, services, and products created by your startup. This can be a measure of quality, quantity, or both.
A process KPI measures how well a process within your startup is performing over a set time period, such as the number of customers achieved per quarter.
Important Startup KPIs
For a startup to grow over time, there are a number of KPIs that can’t be overlooked. These are often tied directly to sales, revenue, and customers, such as the cost to acquire a customer, lifetime value, churn rates, and recurring revenue or growth rates.
Customer Acquisition Cost
Customer acquisition cost (CAC) measures how much money a business spends on acquiring a customer. To calculate CAC, add up every marketing and sales expense over a specific time period and divide it by the number of customers acquired.
Customer Lifetime Value
Customer lifetime value (LTV) measures how much a customer spends with your business over the entire lifetime of the business relationship.
Customer Churn Rate
The churn rate, also known as the “attrition rate,” measures the rate at which customers stop doing business with your startup. A high churn rate means more customers are leaving your business or not renewing their subscription.
Monthly Recurring Revenue
Monthly recurring revenue (MRR) is the total predictable revenue your business generates from all of your subscriptions and paying customers in one particular month.
Revenue Growth Rate
The revenue growth rate measures how your revenue has grown over a certain time period. It measures the increase of revenue over a period of time.
Developing KPIs for your startup is easier when you have a set of examples to work from. This section will describe common KPIs used in a variety of industries.
In marketing, commonly tracked KPIs include customer retention, sales revenue, cost per lead, or the cost to acquire a customer (CAC).
Sales KPIs measure specific sales-related objectives such as sales targets for a specific time period, sales growth over time, and the average length of your sales cycle.
Key performance indicators related to financial performance can include your operating cash flow, burn rate (how quickly you’re spending monthly over a time period), and your net profit margins.
Human resources KPIs measure aspects related to employees, such as employee turnover, resume applications received, and happiness or satisfaction through employee surveys.
Customer service KPIs are commonly involved with customer satisfaction surveys and measuring how a certain customer service representative performs.
Information technology (IT) KPIs are technical and commonly related to server performance, website performance, load times, and even bounce rates from your business website.
How to Develop KPIs for Your Startup
At this point, you should understand the importance of developing KPIs for your business and have a good understanding of the types of KPIs you’ll often encounter in your startup.
To develop your own KPIs, the most critical first step is to get together with your team and take some time to brainstorm.
Think through and “reverse-engineer” indicators that feed into your business objectives. By determining KPIs that are inputs or processes first, you’ll be able to track, measure, and understand how your startup is performing in the most formative months and years of your growth.