KPIs, or Key Performance Indicators, are an essential tool for making informed decisions that lead to the progress of startups.
Their primary function is to measure and assess progress toward a specific and relevant goal for the company, whether it’s a process, team, department, or the organization as a whole. A significant number of startups have failed due to their inability to define or select the right KPIs, thus maximizing their resources.
We know starting new businesses can always be challenging, which is why in this article we explain the KPIs you shouldn’t forget to ensure their success.
Which KPIs are important for a startup?
1. Gross Margin
Gross margin is a key financial indicator that shows our company’s profitability after deducting the direct costs of production or service delivery.
To calculate it, we subtract our direct costs from our total gross income. A healthy gross profit margin indicates that we are getting a good return from our core operations, something to consider at the beginning.
2. CAC (Customer Acquisition Cost)
As the name suggests, this KPI indicates the cost of acquiring a new customer. For a startup, knowing this figure is crucial as it provides information about the efficiency of marketing and sales strategies, as well as the need to increase or decrease investment.
Furthermore, if we calculate the time it takes for customers to make a new purchase, we can get an idea of the cash flow we might have.
3. LTV (Lifetime Value)
This KPI is used to estimate the total value a customer or potential customer will bring to a company throughout their commercial relationship. This means calculating how much money a customer is expected to generate over their lifetime as a company client.
The LTV calculation can be beneficial for startups as it allows for more informed decisions related to marketing, customer acquisition, and customer relationship management by assessing how much they can spend on acquiring new customers and how much they can invest in retaining existing ones.
4. LTV/CAC Ratio
This ratio is used to evaluate the efficiency of customer acquisition strategies and a company’s profitability over time.
For a startup, determining financial health in terms of customer acquisition and retention is vital. As a general rule, the LTV should be significantly higher than the CAC for a company to be profitable in the long run. In this way, the new company is efficiently acquiring customers, and the value generated by these customers exceeds acquisition costs.
5. Churn Rate
Churn rate tells us the number of customers or users who stop using products or services over a specific period. This KPI is especially relevant for subscription-based businesses or recurring business models.
A high churn rate can indicate problems in customer retention and negatively impact our startup’s growth and profitability.
6. Burn Rate
The burn rate refers to the rate or speed at which a company spends its capital or cash to fund its operations and expenses. It’s particularly significant for companies in the early stages using capital investment to finance their growth.
This metric is calculated by dividing the amount of cash the company spends during a specific period (usually monthly or quarterly) by the total amount of cash available at that time.
It’s also important for investors, as it can indicate how long a company can sustain its operations before running out of cash.
7. ACV (Annual Contract Value)
ACV, or “valor de contrato anual” in Spanish, represents the total value of an annual contract or subscription that a client pays to the company for its services. In other words, it shows how much money is expected to be received from a customer over a year due to a specific agreement or contract. It’s useful for managing recurring revenue and can help startups make strategic decisions about customer acquisition, retention, and expanding their customer base.
8. ARPA (Average Revenue Per Account)
This represents the average revenue generated per active account or customer over a specific period, usually monthly or annually.
It’s especially used in companies that offer subscription-based services or products, as it helps measure the efficiency of revenue generation from the existing customer base and make strategic decisions about pricing, customer retention, and acquiring new customers.
Payback is crucial for startups when assessing how long it takes to recover the initial investment made, determining its viability and profitability.
It’s calculated by dividing the initial investment by the estimated net cash flows per period until the investment is fully recovered. The smaller the value, the faster the investment will be recouped.
10. MRR (Monthly Recurring Revenue)
As the translation indicates (monthly recurring revenue), MRR is used to measure the recurring revenue a company generates from its customers during a given month.
It’s a fundamental metric for startups to evaluate their growth, profitability, and financial health. It allows them to make informed decisions about customer acquisition strategies, retention, and product development. And, in addition to being used to calculate the churn rate, it’s a key indicator often considered by investors to assess a startup’s viability and potential.
11. Net Retention
This KPI is essential for startups as it provides information about their ability to retain and expand the revenue from their current customers, crucial for the business’s sustainable growth.
It’s also a metric that might be relevant for investors, as it shows the startup’s ability to maximize the value of its existing customer base. A result greater than 100% indicates net revenue growth from existing customers, which is positive.
As you can see, KPIs play a vital role in success and profitability as they provide valuable information about financial health and operational efficiency.
If you’re looking to maximize your startup’s performance and want the backing of financial experts, consider hiring an outsourced CFO. At The Startup CFO, we have a highly trained and experienced team ready to help you achieve your business goals, optimize your financial resources, and take your company to the next level.