As the saying goes: “If you don’t know where you are going, you will never get there…”. So, why is it important for every startup to set up and measure KPIs (Key Performance Indicators)?
YC’s Adora Cheung pointed out: “You should know what state your business is in at all times. So, setting the right KPIs and goals will objectively tell you if you're doing well, just okay, or bad. So, nothing keeps you more grounded, humbled, and realistic about where you are then a bunch of numbers. Because if you interpret those numbers correctly, they don't lie.”
The main task of KPIs is to answer the following critical questions.
* How fast are we growing?
* How much does that growth cost us?
In a broader sense, KPIs serve as assessment criteria of whether a particular action. For example, implementing a certain customer acquisition channel or hiring more customer support agents lead to success or not.
By looking at these metrics, the founding team should be able to get an answer. Usually, if revenue and the number of new customers go up while customer acquisition costs go down, the action must have been the right one.
Primary and secondary
Apart from assessing the overall health of the startup and give feedback on the team’s decisions, KPIs are vital for resource allocation. Do we invest the budget in marketing Channel A or Channel B? Do we spend time developing app feature A or B?
It is critical not only to understand the importance of KPIs, but also set up the correct ones. Tracking the wrong metrics could lead your company towards the wrong path.
There’s a lot written about the primary metrics every company needs to define from day one, often referred to as the ‘North Star’ metric. By looking at how this KPI changes over time, one almost certainly can understand how well the business is doing.
In almost all cases, especially for early-stage startups, the primary metric should be the revenue. Or in case the startup hasn’t generated revenues yet and require some critical mass of users to start generating revenue – via social networks, gaming, some marketplaces - new users.
There’s less guidance available on the secondary metric, which is equally important and must be defined by founders to answer the question: How sustainable is our growth? Founders should think about what is relevant to their business model and the stage their company is in. These could be customer acquisition costs, profit contribution or margins, retention rates or cohorts.
It is usually recommended to define growth targets for the primary metric and cap the secondary metric. For example, 30 per cent month-over-month and revenue growth at $50 CAC (customer acquisition cost).
And lastly, for the startup to become successful, the KPIs must be translated into company goals and the whole team must be united in reaching them.