When you’re starting up a business, it can be difficult to comprehend how well you’re doing. Is any progress being made? Is the company scaling faster than can be kept up with? Or is it at a stand-still?
A gut feeling is no way to get an accurate read on business growth. Just because your executive team might “feel good” about the way things are going doesn’t mean anything when the hard numbers say otherwise.
To get a valid reading on what’s going on in your startup, you need to rely on data. However, not all data points are made equal. Some metrics can give the illusion of success when in reality, things are struggling. On the other hand, choosing data that is not representative of your full progress can make things look bleaker than they are.
A proper key performance indicator will give an accurate overview of your progress and will meet all of these four criteria:
- Actionable. They must tangibly show what improvements can be made to grow successfully.
- Measurable. A vague KPI is no good. There should be no issue in tracking KPIs since they must be easy to quantify and interpret.
- Timely. A KPI that relies on old data doesn’t accurately represent what’s happening right now. A good KPI must represent current progress. The only time your KPI doesn’t need to be timely is if it’s just used as a benchmark comparison.
- Impactful. Your KPIs should reflect your business goal. Improving performance in any of your KPIs should then move you closer to your ultimate goal.
Stay informed in the best ways by keeping track of these seven important KPIs that present an accurate view of how the business is doing.
1. Cost of Customer Acquisition (COCA)
What’s that saying about having to spend money to make money? As it turns out, the sentiment rings true – but only to a certain extent. It’s simple math: if you’re spending more than you’re making, you’re not making anything.
One of the first things you should do when growing a startup is check in to determine how much your company is spending to acquire a new customer. In KPI speak, this is called the Cost of Customer Acquisition, or COCA.
Here’s how to calculate it: Add up your sales and marketing expenses during a period and then divide it by the number of new customers acquired during that same period. You’ll be left with the cost it takes to acquire one single customer.
The COCA is pretty irrelevant unless you know how much your average customer spends. For example, a COCA of $800 might seem incredibly high at first glance. But if you’re selling roofs and your average customer spends $20,000, that’s a pretty good ratio.
If your COCA isn’t showing the results you were hoping for, you can decrease it by trying a couple of things. One idea is to zero in on the marketing channel that has the lowest COCA and re-targeting marketing efforts there. Another idea is to set a referral program in place to incentivize current customers to refer a friend. This way, they’re doing the marketing for you and you can gain additional customers by doing so.
Calculating the COCA shows just how expensive it can be to acquire and convert a new customer. That’s where retention comes in. Retaining a customer can be much more affordable than acquiring a new one – and it can increase your LTV (see below).
Your business’ retention rate is the number of buyers who will either make a second purchase or retain a subscription. When retention rates are high, it shows that you’re maintaining strong relationships with past customers and giving your audience what they want.
Here’s how to calculate it: simply divide the number of active customers that make a second purchase (or continue a subscription/membership) by the total number of active customers in that period.
3. Customer Lifetime Value (LTV)
Your business’s Customer Lifetime Value, or LTV, is the dollar amount that one customer will spend on your products or services throughout their lifetime. Ultimately, this KPI shows how successful you can anticipate your business to be in the long term.
It’s also helpful to compare the LTV with the COCA. As long as the LTV for each customer is higher than the COCA to get them, you’ll be making money.
Here’s how to calculate it: Multiply the amount of your average transaction by the number of repeat sales and again by the average time of customer retention.
For example, break down how much a customer spends within a given time frame. Let’s say they spend $50 each month. That’s $600 each year. Now, how long does one customer stick around giving you their business? Let’s say 3-5 years. If that’s the case, you can expect your customer LTV to be between $1800 – $3000.
If your business’ LTV isn’t as high as you’d like it to be, here’s a tip: work on customer service. Customer service can have a big impact on whether or not your customers keep coming back. It’s always cheaper to keep a customer than to acquire a new one, so the costs spent on customer service will be worthwhile.
4. Revenue Growth Rate
When you’re starting up a business, it’s crucial to pay attention to both how well it’s growing and how fast it’s growing. That can seem like a vague component to measure, but in calculating your revenue growth rate you can effectively observe it.
This financially based KPI refers to the actual rate your business income is growing. Revenue growth requires a lot: finding and attracting the right buyers while also holding on to the ones you’ve got. Doing both at the same time can be a real balancing act, but it’s arguably the most important KPI to pay attention to as a startup.
Not only does tracking your Revenue Growth Rate help monitor current sales levels, but it’s also a big help in making strategic decisions for the future. By getting a bigger picture at the company’s performance over time, your team will be better able to make smart decisions moving forward on sales strategy.
Here’s how to calculate it:
- Take the total revenue from the last sales period and subtract your current sales period’s revenue from it.
- Next, take that number and divide it by the revenue from your last sales period.
- Finally, multiply by 100.
To illustrate, suppose you made $100 in revenue first sales quarter and $150 in your current quarter. In subtracting 150 from 100, you can see that $50 was gained. Then, divide that $50 by the first quarter’s $100 and the answer is .5. For the final step, multiply that by 100 and you’re left with a revenue growth rate of 50%.
5. Month Over Month Growth
If you’re still in the infancy stage of business growth, it might be difficult to calculate revenue growth rate without much to compare it to. This is where the month-over-month growth rate comes in handy. Even without tons of data to go off of, you can still get a good idea of how well you’re doing.
Here’s how to calculate it:
- First, decide what you’re going to measure. This can be something like the number of customers, revenue, or site conversions. You’ll want to measure this same value over two consecutive months.
- Subtract the first month’s value from the second month’s value, then divide that answer by the first month’s value.
- Finally, multiply by 100 to get a percentage.
Let’s say your first month saw 250 site conversions. This month you saw 300 conversions. In tracking the month-to-month growth, you would subtract 300 – 250 to get 50 and then divide by 250, which equals .2. In multiplying by 100, you’ll see a 20% growth rate from the current and previous months.
6. Gross Profit Margin (As a % of Sales)
A new business can’t see any substantial growth if it is paying out more to its suppliers than it’s receiving in revenue. To illustrate the company’s total profits in comparison to revenue, you’ll need to calculate the gross profit margin as a percent of your sales.
This is a great KPI to track overtime to get a quantified look at how much money your team is keeping when compared to what’s getting paid out. You’ll notice that as you begin to retain more and more money, the gross profit margin will also increase. If you notice a sudden decrease in this margin as a percent of your sales, that could be pointing to an over-spending problem.
Here’s how to calculate it:
- You’ll first need to identify the gross profit margin (GPM). This is discovered by dividing gross profits by sales.
- Then, again divide that value by your sales amount.
- Finally, multiplying that number by 100 will give the gross profit margin as a percent of sales.
To make it more clear, first, the gross profits must be calculated. If total revenue is $20,000 and the cost to create and sell the goods/services is $5,000, then the gross profits are $15,000. Then, divide the gross profits ($15,000) by revenue ($20,000) to determine a profit margin of .75. To see this number as a percentage of sales, simply multiply by 100. Now you can see that your growth profit margin as a percentage is 75%.
7. Online Conversion Rate
A key part of any modern business is a robust digital presence. In addition to profiles on the relevant social media channels, it’s also important to create a strategic website landing page to get sales going.
The entire purpose of a landing page is to convert visitors into buyers, or at least into leads. If your conversion rates are low, your landing pages aren’t doing their job well enough and you’re missing out on sales.
A healthy online conversion rate should be somewhere around 5-6%. The average landing page conversion rate is a bit lower, around 2.5%, but that data includes pages that don’t convert at all. To succeed online, keep your conversion goals high.
Here’s how to calculate it: Divide the number of people who made action on your landing page (called conversions) by the total number of people landing on your page (also known as traffic). Multiply that number by 100 to get the rate.
As an example, if 200 people visited your page within a month yet only 2 converted, you would divide 2 by 200 to get .01. In multiplying that by 100, the conversion rate would be 1%. Taking the information from above, it’s clear to see this conversion rate would be extremely low. This should prompt any leadership team to take a closer look at the call-to-action (CTA) and copy written on the page.
KPI Maintenance and Business Growth
The key performance indicators listed above are a perfect starting point for a new business that wants to get its act together. However, these can’t be the only guiding metrics you use as you scale and grow your business.
Every industry and every business within each industry will have its own unique set of goals and objectives to reach. Using these goals is the best way to discover the KPIs that matter most for long-term projections and the years to come.
It’s also important to keep in mind that you’re never fully committed to any KPIs. They’re flexible data points that are specifically chosen to serve a certain purpose. If your business’ purpose changes or if a KPI no longer matches your needs, it’s perfectly fine to switch it up.
As you go down the road of business ownership, you’ll find the KPIs that most align with your goals and you’ll learn to keep them close. But when you’re still getting things off the ground, the KPIs above are a good place to start.