The Key Performance Indicator for Startups, Five Indicators that You Should Not Neglect
In this article, we will introduce five key performance indicators of startups. Key performance indicators (KPIs) are tools for evaluating the success of startups by founders and venture capitalists. The status of some KPIs also plays a decisive role in the success of startups in attracting capital, as well as advancing negotiations with investors.
For example, suppose your startup product is a native messenger. It has grew by 40,000% in 2020 compared to2019 in the KPI of the “average number of monthly active users”. Obviously, the status of this index is so attractive that any investor will be eager to have a meeting with your team.
Average Revenue Per User Index
This key startup performance indicator is a subset of key financial indicators. It shows the average revenue per user. In order to calculate the ARPU, the startup revenue and the number of users during a period must be specified.
Consider, for example, the revenue of two startups in the same industry that have passed their early stages of growth. Suppose they earn $ 100 and $ 140 per user, respectively, over one year.
Apparently, the startup that earns $ 140 per person is more attractive to investors. But checking the revenue earned per user exclusively may mislead the startup or investor. Why? The cost to attract each user may be as high as $ 200. In this case, $ 140 per user is not attractive at all. Therefore, to increase the accuracy of the survey based on this index, it is necessary to calculate the customer attraction cost index.
The ARPU, or average revenue per user, is also used in startup financial forecasts. For example, if a startup ARPU is 10 dollars, predicting the user growth to 30,000 in the next six months, we can say that the estimated revenue of this startup will reach 300,000 dollars.
Monitor ARPU or Average Revenue per User on Facebook
Another purpose of this key indicator of startup performance is to enable the startup to maximize revenue by analyzing its historical financial information. For example, Facebook uses this index to calculate the amount of revenue earned in four geographical regions of the United States and Canada, Europe, Asia-Pacific and other parts of the world. The results of these calculations show in which area users earn the most money for Facebook. So along with this information and the results of other analytics like Cohort, Facebook can better maximize revenue from the most important areas by using the most efficient marketing channels.
Customer Acquisition Cost
The CAC, or customer acquisition cost, which indicates the effectiveness of marketing costs and the strength of the business model, is essential to investors. By using this key performance indicator, it is possible to evaluate the cost of attracting each new user. It also shows if costs have increased the number of customers and earned money.
Startups are often associated with high marketing costs due to their transformative nature. The important thing about marketing costs for a startup is whether it leads to revenue in the long run or just is a waste of money. Sometimes a startup can’t attract users or earn a substantial income that compensates for the costs of attracting them. This may be because of its business model.
To calculate this index, it is enough to divide the marketing and sales costs of attracting new users in a certain period of time by the number of users attracted in that period. For example, if the price of attracting customers and the number of attracted ones in the last month is $ 1 million and 100,000 customers, respectively. The cost per customer or CAC is equivalent to $ 10.
Essential Points in Calculating the Cost of Attracting Customers
The critical point in calculating this index is to consider all customer acquisition costs; From promotions and discounts to travel expenses to the digital marketing agency with which the startup works. Another important point is about the denominator of the CAC calculation formula. Here, you should eliminate organic customers and consider only those attracted at a cost.
By analyzing recruitment costs and revenue per customer trends , the investor can assess the productivity of startup marketing campaigns. Also, by examining this indicator for marketing channels, you can identify the best ones and optimize the startup marketing as much as possible. Furthermore, comparing the cost of attracting customers with similar startups, defines the relative performance of the startup.
The cost of attracting customers varies from start to finish. Naturally, these costs are high in the early stages and gradually decrease as the startup matures. For example, in a mature startup, about 50% of customers may be attracted organically rather than with marketing expenses.
Comparison of Two Key Performance Indicators: Average Revenue per User and Cost of Attracting Customers
We suggest following the numbers and charts for average revenue per user, and customer acquisition cost in a separate Excel sheet. More important than following the trends is identifying the parameters that determine the amount of income, cost of absorption and then analyzing the sensitivity of these parameters.
For example, a startup with the Fermium revenue model may not be able to maximize the average revenue per customer. But instead, it may be able to increase the conversion rate of the free version to the paid version. It can also identify the most profitable marketing channels, the most effective promotions, etc., by analyzing the information of the implemented marketing campaigns and thus minimize the cost of attracting customers.
Retention Rate
Attracting new users is definitely vital for a startup. But keeping current users is just as important. User retention rate is a key performance indicator of a startup that shows how well you have done in retaining your users. Not every loyal customer needs to be with you for long. But if you are constantly losing your current customers, you need to make adjustments to your business model.
To calculate this index, just subtract the number of new users during a period from the number of users at the end of the same period. Divide the resulting number by the figure of users at the beginning of the course. If the result is less than one, the startup has not successfully retained its customers, and it is better to correct this trend.
Starbucks, for example, has facilitated the buying process to retain customers. An example of Starbucks’ efforts to keep customers in a competitive market is the feature to shop online for in-person buyers. The customer can place the order and pay for it before reaching Starbucks. By doing this, the buyer will receive the order as soon as he/she arrives. This speeding up order is an example of an in-product service to keep the customer.
Burn Rate
Burn Rate shows the expenses during a specific period in comparison with the existing capital. Consider a tech startup that has not yet made a profit. The startup pays for office rent, servers, and employee salaries. The Burn Rate of this startup is equal to the sum of these costs.
But if the startup is profitable, the Burn Rate will be different. For example, if a startup costs $ 8 million and revenue $ 5 million over a month, the Burn Rate would be $ 3 million. In other words, it has spent 3 million dollars more than the income.
This key performance indicator helps you estimate how much capital you need in the future. Investors can also evaluate the time of the following capital injection. The Burn Rate indicator also shows the relative risk of investing in a startup compared to similar ones.
Amazon’s $ 3 Billion Loss
Of course, you should know that due to the nature of growth, scalability, and the great importance of initial measures, startups incur high costs before earning money. Take Amazon, for example. Despite steady growth in revenue and profit margins, Amazon had a cumulative loss of $ 3 billion in 2003. Part of this accumulated loss was marketing costs ($ 742 million) and technology development costs ($ 1,100 million) from 1999 to 2003.
Therefore, just as the very high costs to increase the scale of startups in the early stages are natural and necessary, it is also essential to pay attention to key performance indicators. Meanwhile, monitoring, managing, and optimizing KPIs related to internal costs, such as Burn Rate, is essential.
Cash Runway
This key performance indicator helps founders and investors calculate how long a startup will last, considering existing capital, costs, and revenues. This is a warning indicator to raise money and modify revenue-raising strategies before running out of existing capital. Therefore, focusing on this key performance indicator can eliminate the risk of startup failure due to a lack of money.
Consider, for example, a startup with $ 200 million capital and no revenue. With an average monthly cost of $ 50 million, the startup will reach zero after four months. Therefore, the founders should devote part of their time and energy to raising capital.
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