What key startup metrics should your digital business be using? Discover the importance of KPIs for startups, and which metrics are the best ones to use.
When you’re working on a startup idea, whether a smartphone app, online marketplace, or piece of SaaS software, how do you know what’s working and what isn’t?
Table of contents
- KPIs for startups – why are they so important?
- The best key startup metrics for your digital business
- Top tips for making the most out of key metrics for your startup
Through the use of metrics.
Metrics let you see how your performance is improving over time, as well as how you’re doing compared to your competitors. If you want insight into how you can make your business better and improve the odds of success, they’re invaluable!
The key is choosing the right metrics to monitor. Many startups fail at the first hurdle because they opt to monitor ‘vanity metrics’ like email open rates, web visitors, and social media likes. While these statistics generally look fantastic on paper, they don’t tell you a lot about the state of your startup.
If you’re wondering which key metrics are right for your startup, we’ve put together this comprehensive guide to help. We’ll look at the importance of metrics and KPIs, some metrics you should consider, and how to ensure you get the most out of your results.
And remember, as always, if you’re looking for a company that can help you launch your startup and give you the edge over your competitors, we’re here to help.
KPIs for startups – why are they so important?
When you’re busy finding developers, creating the perfect MVP, and working out how to launch your product, identifying the perfect metrics can seem like a chore. You’ve got better things to do with your time… right?
However, determining your metrics and the KPIs that will lead you towards successfully achieving them, will pay off.
When should you identify the KPIs you want to use in your startup? As soon as you possibly can. As soon as you know the goals you want your business to achieve, you’re in an excellent position to start thinking about metrics.
Here’s why KPIs for your startup are such a big issue:
- They can help you monitor your performance and see what you’re doing well;
- They provide a way of seeing what you need to improve or where there are inefficiencies;
- They’re a way of helping you achieve your startup’s goals and drive you forward;
- They provide you with tangible data you can use to quickly and efficiently make business decisions;
- They promote accountability and transparency within your startup. You can share them with your employees and stakeholders, so they know how you are performing at all times;
- They give you a way of seeing how loyal customers are to your business;
- They let you benchmark against your competitors and industry standards;
- They can help you get funding. Showing the success of your product or service, as well as how you predict it will do in the future, can increase the chances of getting an investment.
A great example of a business that ensures it is continuously monitoring the right metrics is Netflix. In the early 2000s, the company acknowledged that it needed to change the metrics it reviewed as it transitioned from DVD rental to streaming.
By looking at metrics like customer retention and subscriber growth, it got the data it needed to improve the user experience and invest in the right content. Over the years, the platform has regularly reviewed and changed the metrics it monitors to get the best results. For example, moving from the number of households that viewed a portion of a programme to viewing hours in order to align it with other streamlining services.
The best key startup metrics for your digital business
So, which key metrics should your startup be monitoring? Choosing the right ones will give you lots of data you can use to supercharge your startup. Here are some of our recommendations:
1. Activation rate
The activation rate tracks how many users carry out a specific milestone when going through the onboarding process. For example, completing a tutorial, adding a friend, or sending their first message.
It’s calculated by dividing the total number of users that complete the milestone by the total number of users that signed up and dividing by 100 to get a percentage.
A high activation rate means that your onboarding process is clear and appealing, increasing the chances of people on a free tier becoming paying subscribers.
2. Active users
Active users measure how many customers regularly use your product or service – it’s typically measured daily or monthly. This metric is ideal for identifying regular users, rather than people that login once and never do it again.
Of course, it’s essential to clearly define what you class as an ‘active’ user. For example, if you’re tracking monthly, is it someone who logs in once a week, once a month, or every day?
3. Average revenue per user (ARPU)
ARPU focuses on how much money each user of your product or service generates for your startup.
It’s one of the easiest metrics to track and is a great way to see how much customers are willing to pay for your product or service. If you sell tangible products, you can also calculate average revenue per unit, which is how much money you receive by selling one unit of a product.
4. Customer acquisition cost (CAC)
CAC tells you how much you’re spending in order to bring new customers on board.
It’s a great way of seeing how effective your individual sales and marketing channels are, and if you need to make any changes.
5. Customer lifetime value (CLV)
CLV looks at how much money a customer spends with you during the course of their relationship with you. While it’s one of the more challenging metrics to monitor, it’s valuable for determining customer loyalty and which audiences are the most profitable.
CLV works well when it is paired with CAC. If you’ve spent a lot of money to onboard a customer, but they’re spending a lot over the course of their relationship with you, it can make a high CAC feel more justified.
6. Churn rate/retention rate
The churn rate is the number of customers who cancel their subscription to your product or service in a specific time frame. Conversely, the retention rate is the number of customers your business has kept in a set time frame. You can measure both by either number of signups, or revenue earned.
While you’ll always have customer churn, this metric helps you see if there are any issues. A high churn rate, or one that wildly fluctuates, may mean you’ve made changes that your customers don’t like.
7. Gross margin
Gross margin looks at the revenue left over following the deduction of the cost of goods sold, expressed as a percentage. So if you generate $100,000 in a year and the cost of goods sold is $10,000, your gross margin would be 90%.
The higher your gross margin, the more capital your startup keeps, which is beneficial to your business. If your gross margin starts to decrease, it may be a sign that you need to look at your overheads or increase your prices.
8. Monthly recurring revenue (MRR)
MRR is another easy metric for your startup to monitor. It’s just the total amount of revenue your business generates in the space of a month. You can also monitor this metric annually – in this case, it’s known as ‘annual recurring revenue’ or ARR.
This metric is an excellent way to see if you’re keeping customers, as well as if they’re spending more with your business.
9. Return on investment (ROI) and return on ad spend (ROAS)
ROI and ROAS measure the revenue you receive compared to how much money you spend on marketing. ROAS refers specifically to advertising, for example, paid social or PPC, while ROI looks at the overall profitability of a marketing campaign.
ROI is similar to CAC, but you’re looking at overall revenue rather than revenue per customer. It can be a quick and easy way to see which marketing campaigns you should be putting more focus on.
10. Viral coefficient
The viral coefficient is the number of new customers or users generated by each of your existing customers. If you have a referral program in place, this is a good way of seeing whether your scheme is successful or not.
A high viral coefficient means you’ve got lots of loyal and happy customers that are delighted to promote your product or service to other people.
Top tips for making the most out of key metrics for your startup
We’ve looked at some of the best key metrics your startup should be using. But what else can you do to optimize the results you get from the KPIs you choose?
Here are some of our top tips:
- Understand your goals before you choose the right metrics – you want to ensure the metrics you choose to align with your overall business strategy;
- Focus on quality rather than quantity. It’s better to track one or two metrics that help you measure business performance rather than many vanity metrics. Sean Ellis recommends identifying one primary ‘North Star Metric’ that will help your entire team move towards a clear goal;
- Don’t fall into the trap of monitoring metrics just because they’re easy to calculate. If they don’t benefit your business and help you achieve your goals, you shouldn’t be using them;
- It’s best to use metrics alongside other metrics to get the most insight into how your business is doing. For example, a high churn rate and low ARPU may mean you’re going after the wrong customers;
- When identifying goals, make sure they’re SMART. This means they are:
- Specific. Are clear and precise
- Measurable. Can be easily monitored
- Attainable. Are challenging to reach, but not so hard that you can’t achieve them. It’s all about finding the right balance!
- Relevant. They focus on the right outcome
- Time-based. You set a date by which the outcome should be attained
- Make sure there is accountability in place. Identify who is responsible for reporting on your KPIs, and who is responsible for ensuring they are achieved. When someone is accountable, they take charge and take responsibility for the results;
- Don’t use metrics as a way to control and reprimand your staff – this can lead to micromanaging and toxic work culture;
- Put regular reporting in place – whether this is daily, weekly, monthly, or quarterly. This means you always have the data you need to make the right decisions. Just make sure you track the same period of time each time to ensure the most accuracy;
- Monitor both leading (predictive metrics) and lagging (historical metrics). This will provide not just valuable insight into how you’ve performed, but how you will fare in the future;
- Regularly review your key startup metrics to make sure they’re still relevant. Your goals will change as your startup evolves, which means your metrics will need to change too;
- And finally… listen to your customers! By asking what they want from your startup as well as what makes them want to leave, you’re in a better position to keep your key startup metrics nice and healthy.
We hope you found this guide to key startup metrics useful. If you’re looking for more advice when it comes to starting, launching, and running a startup, why not check out our regularly updated blog?
KPIs (Key Performance Indicators) are crucial for startups as they help monitor performance, identify areas for improvement, achieve business goals, make data-driven decisions, ensure transparency, and attract potential investors.
It’s recommended to identify KPIs as early as possible, ideally once you have clear business goals in mind. This allows you to align your metrics with your objectives from the start.
Some essential startup metrics include:
– Activation rate: Measures users completing specific milestones during onboarding.
– Active users: Tracks the number of customers who regularly use your product.
– Average Revenue Per User (ARPU): Calculates the revenue generated per user.
– Customer Acquisition Cost (CAC): Determines the cost to acquire new customers.
– Customer Lifetime Value (CLV): Evaluates the total value a customer brings over their relationship with your business.
– Churn rate/Retention rate: Measures customer attrition and retention.
– Gross margin: Calculates revenue after deducting the cost of goods sold.
– Monthly Recurring Revenue (MRR): Tracks monthly revenue generated.
– Return on Investment (ROI) and Return on Ad Spend (ROAS): Evaluates profitability from marketing efforts.
– Viral coefficient: Measures how many new customers each existing customer brings.
The activation rate measures the percentage of users who complete specific milestones during the onboarding process, such as completing a tutorial or sending a first message. It helps gauge the effectiveness of your onboarding process.
Active users indicate customer engagement and the popularity of your product. This metric distinguishes regular users from one-time visitors, helping you tailor your strategies accordingly.
CAC helps evaluate the efficiency of your sales and marketing efforts by measuring the cost of acquiring new customers. Lowering CAC can lead to better profitability and growth.
CLV shows the total value a customer brings to your business over time, allowing you to determine the profitability of acquiring and retaining customers relative to the cost.
Churn rate reflects customer attrition, while retention rate measures customer loyalty. These metrics help identify issues and ensure you’re retaining valuable customers.
Gross margin indicates the profitability of your product after accounting for production costs. Monitoring gross margin helps manage expenses and pricing strategies.
Some optimization tips include:
– Align metrics with business goals.
– Focus on quality metrics over vanity metrics.
– Use metrics in conjunction for comprehensive insights.
– Ensure accountability for tracking and achieving KPIs.
– Regularly review and update metrics to stay relevant.
– Listen to customer feedback for continuous improvement.
A North Star Metric is a primary KPI that aligns the entire team towards a specific goal. Focusing on this key metric ensures unified efforts and a clear direction.
Regular reporting—daily, weekly, monthly, or quarterly—is recommended to make informed decisions. Consistency in tracking periods ensures accuracy.
As your startup’s goals change, your metrics should adapt accordingly. Regularly review and adjust your metrics to remain aligned with your evolving business objectives.
Listening to customer feedback, understanding their needs, and identifying why they might leave your product or service can help you maintain a healthy set of startup metrics.