For startups, it’s critical to be able to monitor and communicate progress towards goals. Metrics are the building blocks that allow startups to monitor the success of their activities and processes as they work towards their objectives. If a business is getting off track, metrics can serve as a valuable tool to diagnose the problem and point to actions that need to be taken to the solve it. Needless to say, defining the right metrics to monitor is crucial for any business – especially startups. Founders need an “up close and personal” relationship with their key metrics if they have any desire to grow their company and achieve their long-term goals.
We get it – measuring every little thing going on in a busy startup can be difficult and time-consuming. It’s easy to lose track of monitoring your success when you are so focused on business planning, product development, finding investors, building a team, and everything else that goes into getting a business off the ground. That’s why we’ve outlined the 10 essential metrics that all startups should prioritize.
1. Gross Margin
- What is it? – A company’s revenue after subtracting only the direct costs of producing the goods for sale.
- What does it tell you? – How production costs relate to your revenue.
- Why is that important? – A low margin means that your startup will not have enough income left over to cover fixed expenses or the other costs of running the business. In order for a business to be successful, it needs to be able to cover fixed costs because they cannot be avoided, regardless of production or sales.
2. Customer Lifetime Value (CLV)
- What is it? – A prediction of the total amount of money a customer will spend throughout their relationship with your startup.
- What does it tell you? – The profit your business makes from any given customer.
- Why is that important? – CLV can act as a benchmark for future growth and expansion. It demonstrates the significance of repeat business and helps you to better understand your customers.
3. Customer Acquisition Cost (CAC)
- What is it? – The amount of money you need to spend in order to gain a new customer.
- What does it tell you? – The efficiency and return on investment (ROI) of your marketing efforts.
- Why is that important? – In order for a startup to gain traction and become profitable, the customer acquisition cost needs to be lower than the customer lifetime value.
4. Customer Retention Rate
- What is it? – The percentage of customers that stay with you over a given time period.
- What does it tell you? – How much your existing customers like the product.
- Why is that important? – High retention rates are a god sign for growth, while low retention rates may signal something is wrong with your product. It costs less money to retain your existing customers than to acquire a new one.
5. Cash Burn Rate
- What is it? – How much cash you are spending during a given period of time (typically measured by month).
- What does it tell you? – How much time is left before you run out of money, how close you are to breaking even, and when you will start generating profits.
- Why is that important? – 82% of startups fail because of bad cash flow management skills or a poor understanding of cash flow. This is also a metric that investors focus on.
6. Conversion Rate
- What is it? – The percentage of people who take action after seeing an offer.
- What does it tell you? – This is a very broad term, but conversion rates can tell you anything from how successful your advertising and marketing is to how many website visitors are actually making a purchase.
- Why is that important? – You can focus on improving processes with low conversion rates and see if the changes you are making have an impact.
7. Month-Over-Month (MoM) Growth
- What is it? – The average of monthly growth rates.
- What does it tell you? – You can measure the growth rate of monthly revenue, active users, number of subscriptions, or anything else that is considered a key factor in the success of your company.
- Why is that important? – MoM growth can help you benchmark where you are in relation to your competitors and attract investors.
8. Inventory Size
- What is it? – The amount of raw materials and partially or fully finished goods a company has.
- What does it tell you? – What portion of the company’s assets are ready or will be ready to sell.
- Why is that important? – Inventory is one of the most important assets that a business possesses, but it can be hard to find a good balance. Many entrepreneurs find that they either have too much inventory (which can lead to cash flow problems) or not enough (causing lost sales).
9. Operational Efficiency
- What is it? – Operational efficiency is the ratio between everything going into production (like money, time, and labor) and the end result.
- What does it tell you? – The most cost-effective way to deliver your product, while still ensuring quality.
- Why is that important? – As a business grows, so do the related inputs. Its important to figure out what inputs are dispensable and streamline your processes early on.
- What is it? – The percentage of a market controlled by your business.
- What does it tell you? – How your company is performing relative to its competitors in the same space.
- Why is that important? – Knowing your market share can help you make strategic adjustments to your product and service offerings, so you don’t fall behind your competitors.
Taking the Next Step…
These 10 metrics are a great place to start when it comes to measuring progress towards your startup’s goals. As your startup grows, the need to manage and measure data will grow with it. Eventually, you may want to consider implementing a data visualization and management system. This will make data more accessible and understandable to everyone else in the company. It is especially useful to have clean, readable data available in a startup where it is crucial that everyone be on the same page in terms of what you are measuring, why you are measuring it, and how it relates to your long-term goals.
Note: Most of the definitions of these KPIs are from Investopedia.