Startup is chaos, but in the hustle and tussle, some goal need to be written down and assessment of such goal can only be done through key performance indicator.
Kpi is a tool that tells if your startup is going up or down. Though it differs according to type of startup, there are still general one you must put into consideration.
How to measure KPI for your startup will be covered in this post, but to know when to measure it, either weekly, Monthly or Annual, you will have to place your startup in comparison with a company that have something in common with yours, and if you can’t find one, trial and error will be your best guide.
Below are the crucial KPI you must check weekly or monthly according to type of startup you are building.
CAC (Customer Acquisition Cost)
Customers or users will not fall from sky, you need to find them, in doing so you will need to spend a lot of money to make people aware of your product. In other word you will need to market your startup, but when doing this you must know the amount needed to acquire a customer, it would be helpfull when creating your break even point.
How to calculate CAC
Add up all the money spent on advertising your startup, then divide by the number of people that sign in or became your user in a particular period of time usually weekly for new startup and monthly for established ones
For example
Xyz startup spent #1000000 in acquiring 20000 users for a month.
This Startup CAC would be
#1000000/#20000
= #50
Xyz CAC is #50 per customer
Note on CAC
To know if your CAC is to high you need to calculate your Customer lifetime value and subtract it from your CAC.
To make your startup profitable as early as possible you need to reduce your CAC.
You can reduce your CAC by going for low cost, but effective Customer Acquisition Channel
Your CAC will surely reduce with time as your Startup gain recognition.
Customer Lifetime Value
Before you spend money acquiring User, calculate the amount of money you can get from customers throughout their stay with your startup.
CLV is tricky for startup and sometimes it may be calculated wrongly.
How to calculate customer life time value
To calculate CLV you need to know the life time value (LTV)
LTV = Average Value of Sale × Number of Transactions × Retention Time Period
While
CLV =
Lifetime Value × Profit Margin
To make it understandable let look at an example
If an average sale of an ecommerce is #1, 000, and average customer shop 3 times per year. The average stay of a customer with the business is 3 years.
The live time value of the startup will be
LTV =
#1000 × 3 × 3
= #9,000
Before moving to CLV you need to assume your industry profit margin. For ecommercer it is usually 20% to 30%
Customer Live time Value would be
CLV =
LTV × Profit margin
#9000 × 30%
= #2700
Whatever Acquisition channel the startup above would want to use, it cost must not be upto or more than #2700
Note
For new startup, you have to assume the number of time a customer will relate with your startup.
Customer Retention Rate
Increase your CTR and you increase your profit.
To know if hour startup is doing good with users, you need to measure your CTR, it will tell you your stand with your customer.
Do they really like your product?
Are they coming back?
Is your startup solving every day problem?
To answer these questions you will need to track your retention rate
CRR = ((E- N)/S) x 100
E = Number of customer at the end of a period
N= Number of new customer acquire in that period
S= Number of customer at the start of a new period
For example
You Startup end month December and start month January with 200 customers, then in month January you lost 40 customers.
Before January close you intensify your marketing and gain 80 new customer. At the the end of the month you have 240 customers
Your CRR will be
E-N = 240 – 80 = 160
CRR =
160/240 * 100
= 66%
Note on CRR
A good CRR means your startup is having a good brand
A good CRR will increase your word of mouth marketing
Revenue Growth Rate (RGR)
Revenue growth rate is the amount of revenue your startup made in month or year. You will get accurate result if it is measure in months or yearly.
To calculate RGR follow this example
Startup xyz had #200000 has their January revenue, with addition of customers in February they had #300000
Their RGR is
#300,000 – 200,000/ 200,000 × 100
RGR = 50%
Notes
Increase in revenue does not denote increase in profit
Increase in revenue attract investors
Burn rate
This is the amount a startup spend every month. It is one of the best KPI to consider in startup, it tells you when your startup will run out of cash.
If you are CEO, you will need to check this every 15days, you don’t want to have a month to finish your cash before you start raising fund.
How to calculate your burn rate
To calculate burn rate you need to understand the two type of burn rate
Gross burn rate
This is the amount of money spend on operating cost every month.
E.g
A business spend #200 000 every month
While net burn rate is the amount that remains after Gross burn rate have been subtracted from revenue
E.g
A business spend #200,000 every month and make a revenue of #150,000. Net burn rate is #50,000
If above business have #1000,000 in reserve, the net burn rate will be subtracted from it to know the number of month they have left to raise money.
1000,000/50000
= 20
The startup have 20 month, if their spending and revenue remain constant.
Note
A low burn rate attract investors
