Key Performance Indicators (KPI) for Startup Companies

Key Performance Indicators (KPI) are as important to a startup as the airplane instruments are important to a pilot. Without these indicators, it is impossible to plot routes, monitor, plan or execute a good and safe flight. Therefore, the business decision makers need them for both managerial and tactical reasons.
In addition to helping with company’s strategies, performance indicators are essential for investors who are already part of the company as well as for those who could invest in the startup in the future.
In order to have accurate indicators, the company must strive to collect good data. In the first part of this article, we will initially show the most relevant modern indicators and then, in the second part, we will define what data a startup necessarily needs to collect since the beginning of its activities.

PART 1 — INDICATORS

1 — Active Users

First, the startup needs to define what an active user is. The timeframe can vary greatly depending on the type of service provided by the company. A common way to measure Active Users is to use metrics like MAU (Monthly Active Users) that sums the total number of unique users who used the platform in a period of one month. But the company can also use other timeframes like DAU (Daily Active Users) or much longer timeframes such as 90 or 120 days.

2 — Customer Churn Rate

Customer Churn Rate is the percentage of customers lost during a period of time. A churned customer is one who has canceled the subscription or a customer who has failed to make a purchase within an average timeframe (such as 90 or 120 days).

Formula:

Customer Churn Rate = Customers Churned this Period / Customers at the Start of this Period

3 — ATP (Average Ticket Price)

Average Ticket Price is a sales performance indicator that can be calculated in several ways. But, in general, the Average Ticket is the ratio between the total sales volume and the amount of sales made in the period.

Formula:

ATP = Total Revenue in the Period / Amount of Sales in the Period

4 — MRR (Monthly Recurring Revenue)

Monthly Recurring Revenue is an indicator that measures a predictable monthly revenue, which is fundamental for the company’s cash flow analysis. It is the result of the number of customers, or the number of subscriptions, or the number of sales (it all depends on the company’s activity) multiplied by the Average Ticket.

Formula:

MRR = Number of Customers * Average Ticket

5 — ARR (Annual Recurring Revenue)

While MRR measures the company’s monthly recurring revenue, ARR measures annualized recurring revenue. Annual Recurring Revenue can be used as a benchmark of revenue in the next 12 months (assuming no changes in the amount of users or sales).

Formula:

ARR = MRR * 12

6 — CAC (Customer Acquisition Cost)

Customer Acquisition Cost is the amount of money spent by the company to get each new customer. First, it is necessary to obtain all marketing expenses (including salaries and all sales team expenses) and divide by the number of new customers acquired in the period.

Formula:

CAC = Total Sales & Marketing Expenses / New Customers Acquired

7 — CoGS (Cost of Goods Sold)

For retail companies, the Cost of Goods Sold is quite evident and can easily be calculated using stock movement. But when it comes to startups, technology companies or SaaS, these costs are not so intuitive. By convention, the expenses that must be included as CoGS are:

• Hosting and monitoring costs.
• Third-party software licenses and fees.
• Customer support costs (including employees).
• Website development and maintenance costs.

A typical CoGS for a startup, technology or SaaS business ranges from 5% to 25% of the Total Revenue.

Formula:

CoGS = Hosting + Software fees + Support + Website + …

8 — GPM (Gross Profit Margin)

Gross Profit Margin is the percentage that represents the difference between Revenue and Cost of Goods Sold (CoGS). In other words: the percentage of what is left after the CoGS.

Formula:

GPM = (Total Revenue — CoGS) / Total Revenue

9 — Burn Rate

Burn Rate expresses how quickly the startup is spending money. It is the actual amount of cash that has decreased in a period of time (generally one month). If the company burns cash too fast, they risk running out of money and going out of business. On the other hand, If a company doesn’t burn sufficient cash, it might not be investing enough and may fall behind the competition.

Formula:

Burn Rate = Total Cash Balance Change / Period

10 — ARPU (Average Revenue per User)

Average Revenue per User is an indicator that expresses the revenue generated by an active user over a specific period of time. There are other similar indicators such as ARPA (Average Revenue per Account) or ARPS (Average Revenue per Subscription) which can also be used depending on the type of business.

Formula:

ARPU = MRR / Active Users

11 — LTV (Customer Lifetime Value)

Customer Lifetime Value is an estimate of the revenue any given customer will bring in over time. In the initial stages of the company, this metric becomes somewhat inaccurate and difficult to measure. Once you have more long-term customers, you can more accurately predict the LTV.

Formula:

LTV = ARPU * GPM / Customer Churn Rate

12 — LTV / CAC Ratio

This is probably the most important indicator for the investor. It literally represents how much it is possible to make per user from the amount initially spent to acquire it, thus expressing a return on investment.

PART 2 — DATA TO BE COLLECTED

From the formulas of the indicators, we can create a table with a list of data that must be collected by the startup in order to generate the key performance indicators:

• Active Users
• Churned Customers
• Total Revenue
• Number of Sales
• Sales & Marketing Expenses
• New Customers
• Cost of Goods Sold
• Cash Balance Change

With these data, the company can easily have constant reports or a dashboard of all 12 key performance indicators shown in this article.