It’s important that you define, track & share those KPI to know where you are at & where you are going. Good KPIs will create a culture that’s driven & motivated by them.
Topics: Customer Acquisition Cost, Conversion Rate, Retention Rate, Lifetime Value, Recovery Time, Burn Rate, Runway, Overhead, Revenue, Profit Margin.
It is critically important for the founders of a company to intimately understand the company’s Key Performance Indicators (KPIs). Founders cannot hope to grow a company in any meaningful way without an almost obsessive focus on its KPIs to use when Pitching Investors.
Why? Because KPIs, if constructed correctly, give your own management & potential investors a cold, analytical snapshot of the state of the company – untainted by emotion or rhetoric. This focus must not be limited to the KPIs themselves, for they are merely measurements of outcomes. We look for founders to have an understanding of what switches can be turned on & what tweaks can be made to improve the business, which will then be reflected in its KPIs for Pitching Investors.
Focus should not be on the KPIs themselves, but the meaning behind them and knowing what impacts each one. Let’s review some of the KPIs that are important for Founders to thoroughly understand – for which they should have a strategy, for optimizing. Please note that some KPIs are not relevant to some types of businesses.
- Customer Acquisition Cost (CAC) is the amount of money you need to spend on sales, marketing & related expenses, on average, to acquire a new customer. This tells us about the efficiency of your marketing efforts, although it’s much more meaningful when combined with some of the other metrics below, and when compared to competitors’ CAC.
- Conversion Rate reveals a combination of the company’s ability to sell its products to its customers and customers’ desire for the product. It is particularly instructive to track & review the conversion rate over time and regularly run experiments to improve it.
- Customer Retention Rate (CRR) Acquiring new customers is one thing, but retaining them is even more important. Your CRR indicates the percentage of paying customers who remain paying customers during a given period of time. The converse to retention rate is “churn” (or attrition), the percentage of customers you lose in a given period of time. When we see high retention rates over an indicative time period, we know the company has a “sticky” product and that it is keeping its customers happy. This is also an indicator of capital efficiency.
- Lifetime Value (LTV) is the measurement of the net value of an average customer to your business over the estimated life of the relationship with your company. Understanding this number, especially in its relation to CAC, is critical to building a sustainable company.
- CAC Recovery Time (CAC/RT or months to recover CAC). This KPI measures how long it takes for a customer to generate enough net revenue to cover the CAC. Recovery Time has a direct impact on cash flow and, consequentially, runway.
- CAC to LTV to be the golden metric. This is a true indicator of the sustain-ability of a company. If a company can predictably & repeatedly turn 1-5x into 10x. The most successful founders tend to be those who have an obsessive focus on their KPIs and the drive to constantly look for new opportunities and optimize them.
- 7. Burn Rage (whoops) Rate Understanding your revenue & monthly expenses (fixed & variable) enables you to calculate the company’s monthly Burn Rate (not Br r). This is simply the net amount of Cash Flow for a month when net Cash Flow is negative. If a company’s monthly net cash flow is positive, it is not burning cash.
- Run out (no) Runway is the measure of the amount of time until the company runs out of cash, expressed in terms of months. Runway is computed by dividing remaining cash by the monthly burn rate. We prefer to view a conservative estimate of runway that calculates the monthly burn utilizing current revenue & projected expenses (after accounting for the increased expenses to be incurred post-investment). We require an absolute minimum of 12 months of runway, but have a strong preference for 18 months or more. Short runways cause entrepreneurs to by myopic and not to have the liberty to tweak & iterate when necessary. It also forces them to almost immediately focus on the next fundraising round instead of growing the company.
- Overhead measures the company’s “fixed expenses incurred”, irrespective of the number of customers acquired. Overhead relative to revenue is a reflection of the capital efficiency of a company (ie, all things being equal, a company that generates $1 million in revenue on $200,000 in overhead is twice as efficient as one that generates $1 million in revenue on $400,000 in overhead).
- 10. Gross Merchandise Volume (GMV) is the overall dollar value of sales of goods or services purchased through a marketplace.
- Revenue. Certain businesses find that revenue may not be the most informative indicator of their financial performance. This is especially true for marketplaces for which revenue represents a small portion of overall transactions.
- Profit Margin tells us how much your product sells for above the actual cost of the product itself. Put another way, it reveals how much of the selling price is “marked-up.” This invaluable metric allows us to consider the Return on Investment [ROI] on the cost of the product and is significant in understanding the scalability & sustainability of the company.
- Monthly Active Users (MAU) for companies that have Apps, online Games or social networking sites, MAU is an important KPI. MAU is the number of unique users who engage with the site or App in a 30-day period. Understanding MAU is helpful in determining the revenue “potential” of a company or how well it is currently “monetizing”.
Conclusion: When we speak to founders to learn more about their companies, we ask them for these KPIs – along with their narrative & other information. It is a quick way for us to understand the current state of the business. We have serious concerns about founders who do not know their KPIs. We find that the most successful founders tend to be those who have an “obsessive” Focus on their KPIs and the drive to constantly improve / optimize them and use them when Pitching Investors.
Comments: Do you know any other KPIs that would be good to measure & monitor
from Tech Crunch 07 Feb 17 enhanced by Peter/CXO Wiz4biz