KPIs to measure in your startup and why you need to know them
Conveying your startup concept effectively is a significant element for any founder seeking potential investors. It’s imperative not only to thoroughly understand your startup’s products/services and the technology that supports them, but also to have a comprehensive grasp of investment terminology.
The failure to understand this terminology could result in missed funding opportunities and ill-prepared discussions, potentially crucial to your growth.
KPIs play a central role in both startup management and convincing prospective investors. The analytics and metrics provided by KPIs enable investors to assess the functioning of your startup by comparing potential investment opportunities and equivalent startups. If crucial data points are not established, effectively illustrating growth and progress becomes almost impossible.
Starting to observer these KPIs early can generate a chronological record of data points that can be presented for analysis. These data-rich representations of your startup growth form a compelling argument for investors, and they can also provide much-needed support during the due diligence phase of obtaining investments.
However, it’s important to remember that not every KPI is equally significant for all startups. Understanding the interest areas of your potential investors and your sector is a primary step in discerning which KPIs should be highlighted.
Customer Acquisition Cost (CAC)
The Customer Acquisition Cost, also known as CAC, sums up all the marketing and sales expenses required to secure a new customer. It’s vital to meticulously track all expenses related to customer acquisition to create an accurate portrayal of CAC. Any expenditure tied to acquiring customers must be included in your CAC calculation, or your figures will not add up. It is crucial for startup founders to keep up with industry norms and competitor disclosures to maintain a competitive stance.
It’s similarly important to gauge the CAC recovery time — the duration it takes to regain the costs invested in client acquisition. Different ventures and services can have varying recovery periods, majorly influenced by customer revenue—typically, the more substantial the revenue, the longer the recovery window. In conclusion, by adopting these tenets and understanding different KPIs, especially CAC, you can smoothen your startup journey and ensure more effective communication between potential investors and your company. It boils down to effectively communicating in the same language – the language of your business.
Customer Retention Rate
A Key Performance Indicator (KPI) works in collaboration with the Customer Acquisition Cost (CAC) to illustrate the proportion of clients who continue making payments during a specific period.
Why is this significant? While high conversion rates might reflect positively on your marketing tactics, it’s equally important to retain customers for a long term. A low customer retention rate identifies a vital problem that needs to be addressed.
Conversely, there’s churn (also known as attrition), which represents the fraction of clients discontinuing your offerings within a predetermined duration. The primary objective for any thriving venture is to uphold high customer retention and keep a low churn rate. Clarifications regarding these terminologies often come up when managing a SaaS-based enterprise or any business that depends on membership and subscription payments.
Lifetime Value (LTV)
This metric showcases the total anticipated value of an average customer to your business over the course of their relationship with your organization. Simply put, it pertains to the revenue generation that precedes a customer’s decision to terminate their association with your venture. Recognizing the relation between LTV and CAC is crucial for forging a successful business.
CAC to LTV ration
Some argue that calculating CAC and LTV only assists in figuring out the correlation between these components. This ratio denotes the capacity of your startup to amplify from X to K*X. A higher K represents a better business opportunity. Moreover, the ratio ought to be reliable and steady to be considered a viable business model.
Monthly Burn
This denotes the monthly cash flow that is negative. In layman’s terms, it highlights the funds necessary to keep your venture afloat each month. For instance, if you commenced the month with $10,000 and ended up with merely $5,000, your monthly burn rate is $5,000. Until your company becomes profitable, external funds are required to cover your monthly burn. As the business begins to generate revenue, this rate should gradually diminish
Runway
The measurement which results from dividing raised capital by monthly expenses generates what we call the runway. The runway plays an essential role for startup longevity. If a startup comes to the end of its runway, it often means that its flow of available cash has also dried up, which unfortunately spells doom for many startups. Optimally, the end of the runway should be perceived as an unmovable obstacle, a point of no return where the risk of failure and running out of steam is extensive unless there’s a way to extend the runway. This notion of the runway isn’t only applicable to startups; all businesses maintain a runway. A key distinction is the length of this runway. For startups, this runway is typically shorter, approximately 18 months. In contrast, established enterprises may possess runways that take years, if not generations, to exhaust.
Conclusion
A few vital KPIs have been assessed that every founder should continuously monitor. These KPIs should serve as the catalyst for frequent experimentation and unswerving quest for improvement.
KPIs afford potential investors and strategic allies insights into the fitness, needs, and trajectory of the startup. These metric figures reflect the value of a potential investment, the possible ROI, and the estimated period for the return on the investment. It emphasizes why it is critically vital for the startup’s founder to consistently track these KPIs and keep extensive statistics that capture their variations and improvements
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