The business decisions based on data analysis can help the entrepreneurs to evaluate their performance and improving cost efficiency. The tracking and understanding of key performance indicators (KPI) and metrics are vital for the entrepreneurs and investors to determine business success.
Key Performance Indicators or KPIs, also known as performance metrics, are utilized to measure performance outcomes and how effectively the business objectives are achieved.
KPIs give a clear picture of your business’s status and the accomplished success in reaching desired targets. The proper design and implementation of KPIs can lead a company towards a defined goal, deliver essential feedback, and optimize performance. KPIs perform the following functions:
- They help in monitoring & measuring the business progress in context to business goals.
- KPIs facilitate performance improvement by providing support in decision-making.
- KPIs give a comparative view of your current performance to the set objectives within a specific period.
Key Performance Indicators (KPIs) tracking may include the following:
- Revenue: New customers, average profits, and total revenue.
- Employment statistics: Employee performance, employee turnover, and available vacancies.
- Customer service: Customer satisfaction and average call time
- Marketing: Generated sales and overall effectiveness
- Efficiency: individual and overall efficiency, and efficiency of departmental processes
The entrepreneurs should utilize KPIs as a means of communication to authorize and encourage their company’s employees to take initiatives towards attaining business goals. The efficient KPIs are clear, appropriate, and actionable and precisely communicated to the employees.
Significance of KPIs
Every business requires resources for collection, analysis, and interpretation of business data. Efficient KPI measurement tools facilitate data-based business tracking. Thus, understanding of key performance indicators (KPIs) is vital for analyzing business scalability, growth potential, and specifications for products or services through a data-driven approach. The KPIs related to the business milestones should be defined and measured to attain the encouraging outcomes.
Types of KPI
The key performance indicators (KPIs) differ widely across the diverse types of sectors and processes. Not all the KPIs are the suitable and correct match for various kinds of startups, though the central aim to facilitate precise data on varied business features remains intact. Therefore, it is essential to select the correct KPIs for business performance assessment.
KPIs should be defined clearly in accordance with the principal business objectives. The things an entrepreneur should keep in mind when defining KPI for insightful outcomes are:
- Defining your goals to increase efficiency.
- The setting of achievable goals
- The mode of progress measurement
- Ways of influencing the outcome
- Responsibility of business outcome
- Frequency of review progress
- Application of SMART criteria for KPI evaluation. SMART is for Specific, Measurable, Attainable, Relevant, Time-Bound.
The three broad categories of KPIs are
- Business KPI (high-level KPI): to measure the principal business goal performance, set at the organizational level.
- External KPI (low-level KPI): to measure the external goal performance, set at department or team level.
- Internal KPI (low-level KPI): to measure the internal goal performance, set at an individual level.
The first step is identifying and selecting appropriate KPI that mirrors the organizational goals to measure the performance metrics. The viewpoints and opinions of the experts, data analysts, departmental heads, and managers should be considered in the selection of KPIs. The entrepreneurs should utilize the present analytics for the identification of business processes to be measured. The KPI tracking varies depending on the industry type, where each department with specific objectives focuses on different KPIs.
The factors influencing the KPIs selection for business are:
The KPIs should directly relate to your specific business objectives.
KPIs quantify your company’s performance in relation to the specific goals. Different KPIs can measure and provide data points for your goal of improving sales, increasing the investment returns of your marketing efforts, or refining the customer service.
The entrepreneurs should select the KPIs based on core company goals and major sectors requiring up gradation and optimization. Also, you should consider your management team’s significant priorities and concerns.
The focus should be on a few effective key metrics
The inbound marketing allows measurements with detailed metrics of the clicks, views, conversions, and others. However, the entrepreneurs should focus on measuring and reporting a few specific key metrics rather than numerous ones as less is almost always better. As every business and startup is different, you cannot determine an accurate number of KPIs an entrepreneur should have but can aim for 4 to 10 KPIs.
Consideration of the growth stage of your startup
All the metrics cannot be suitable for your company/startup. Depending upon the phase of growth your company is, some metrics are more relevant than the others. The most relevant and useful metrics for startups in the early stage are focused on business model validation. In contrast, for established businesses, cost per acquisition, and customer lifetime value (CLV) are the main focus.
Lagging and leading performance indicators identification
The understanding of what has happened in the past and the status of current progress in the direction of achieving goals is essential.
Lagging indicators give you the information and data of how you performed in the past. Few examples of lagging indicators are last month’s total sales, the number of new customers, or professional service hours delivered by your company. Lagging indicators’ primary focus is on outputs and thus best for measuring and analyzing results.
On the contrary, leading indicators measure inputs and your progress towards achieving a specific goal in the future. Examples of leading indicators include website traffic, sales opportunity, conversion rate, and sales representatives’ activity. The leading indicators can predict the prospect of a business based on the current progress of a startup.
It is easier to determine lagging indicators that measure the events in the past compared to the leading indicators that measure the current progress. However, a business will benefit significantly from leading indicator measurements as assessed before the emergence of market trends. Identifying leading indicators will help you track your path towards the goals and serve as business drivers to success.
KPIs Are Different for Every Industry
Every startup and its business model differ from each other. The selection of KPIs by entrepreneurs should be based on the significant relevance to their company and the goals to be achieved. The company focus may vary from customer acquisition and churn rate to the average customer sales depending on the type of business. Eventually, the choice of KPIs will influence future success vision.
Steps involved in KPI setting and calculation
- The establishment of vision and mission statements of your startup
- Defining the core principles of your business
- Defining the business objectives
- Making the business goals SMARTER (Specific, Attainable, Relevant, Time-bound, Evaluated, and Readjusted)
- Setting up KPIs for each objective
- Setting up a target for each KPI
- Restating the strategy for each KPI for clarity
- Sharing of business goals and KPIs and the targets among team members
- Breaking down the core business goal into external goals
- Making external goals SMARTER
- Setting up KPI, target and restating strategies for external goals
- Breaking each external goal into internal goals (smaller goals)
- Same process as for external goals
- Monitoring KPIs regularly
- Reviewing and readjusting the goals, strategies, and KPIs regularly
Most Commonly Tracked KPIs
Six categories of critical KPIs should be monitored and measured by all the entrepreneurs.
The entrepreneurs should perform in-depth and thorough market research to understand their prospective customers and make profits through market sales. The startups should be able to estimate their capability to capture the available market. The KPI is:
- Total addressable market (TAM): TAM represents the revenue opportunity or several customers available for a product.
- Target market: It is part of TAM and describes the potential market share that your startup could reach.
It is crucial to track the market share distribution and the proportion holders to go ahead of your competitors competing for the same customers.
Income is the principal metric that should be tracked by the entrepreneurs. They include:
- Monthly Recurring Revenue (MRR): the amount of revenue earned by the startup that recurs monthly.
- Annual Recurring Revenue (ARR): the amount of income earned by your startup that recurs annually
- Annual Revenue per Customer
- Customer Lifetime Value (LTV):
- Customer Concentration Risk (CCR): revenue gained from a single company or industry
- Month-on-month Growth (MoM): The change in growth rate from month to month
The entrepreneurs should always keep their primary focus on customer metrics, which includes Customer acquisition costs (CAC). CAC represents the marketing and sales expenditure done to gain a customer. It indicates the effectiveness of your marketing and sales processes and ROI understanding of your customer acquisition channel. The entrepreneurs should aim for the lowest CAC. The increase in customer numbers and conversion rates should also be tracked by startups.
The backbone of any startup is its funding. Thus, it is crucial to keep track of the funding health of a startup. For this purpose, the entrepreneurs should keep a track on the metrics
Burn-rate: The rate at which a company spends its cash or the negative cash flow of a company. It is of two types. Fixed burn-rate includes the company’s operational costs like rent, salaries, and overhead, while the variable burn-rate includes monthly variable expenses like sales cost and direct costs of goods.
The total number of unique users engaging with a startup’s product or service is tracked by customer engagement metrics. The entrepreneurs’ revenue potential can be determined using this data, which is evaluated on a monthly or daily basis.
Retaining the acquired customers is always cheaper than spending time and money on marketing to a stranger. Therefore, it is essential to track and measure customer loyalty. Startups should track the following metrics:
- Churn rate: It demonstrates the customer retaining capability of a startup, and the rate should decrease over time.
- Retention by cohorts: The review of a group of customers with specific common characteristics can be very informative for the entrepreneurs to track customer loyalty.
- Net Promoter Score (NPS): NPS measures the probability of a customer to recommend your product or service to a friend or colleague. It helps in the customer experience analysis and his perception of your brand.
Some business specific KPIs examples
We have discussed the essential KPIs that every entrepreneur should track irrespective of the business type or business size. There are many other metrics as well, which should be monitored depending on the business type. Different metrics can be tracked depending on the type of company. A brief note on each business type is given below:
- Burn rate
- Activation rate
- Ratio of daily active users to monthly active users
- Customer churn rate
- Revenue growth rate
- Customer Lifetime Value (LTV)
- Monthly recurring revenue (MRR)
- Net Promoter Score (NPS)
- Ratio of CLV: CAC
- Cost per conversion or acquisition
- Marketing expenses and traffic
- Conversion funnel
- Revenue and wins by type
- Open opportunities by stage
- Customer acquisition cost (CAC)
- Sales growth
- Sales conversion rate
- Employee engagement
- Internal Net Promoter Score
- Supervisor satisfaction
- Goal performance
Customer Support KPIs
- Customer Satisfaction Score (CSAT)
- Net Promoter Score (NPS)
- First Response Time
- Customer Retention Rate
KPI Tracking Tools
Some of the most used KPI tracking tools are as follows:
Geckoboard offers a bright KPI tracking dashboard for startups with a characteristic feature of a drag-and-drop interface. It can integrate with different business software like Google Analytics, Shopify, and Salesforce. Geckoboard creates attractive visualizations from the Excel worksheets or other program data. Its setup is very simple and easy to use.
One of the most popular KPI tracking solutions, Salesforce, allows building personal dashboards for your business. Salesforce is the best tool to keep your teams focused on essential business metrics.
Tableau is outstanding analytics and KPI tracking tool which facilitates pre-built KPI templates to track your own business. Its characteristic feature is the real-time data blending.
Tableau can blend data from different sources, like Salesforce, Analytics, or even Excel. This data is utilized to gain actionable insights about your business’s health.
SimpleKPI tracks different metrics like financial metrics, operational metrics, marketing, and service metrics and is very simple and user friendly. It is suitable for different types of businesses and can integrate with numerous popular software packages.
Asana is excellent for project-based KPI tools that permit the tracking of tasks, projects, conversations, and dashboards. Asana’s dashboard offers a range of tactical overviews that can be utilized for progress tracking across every individual project.
The understanding of the company’s key performance indicators (KPIs) is vital for entrepreneurs to grow their business to achieving success. The measurement and identification of the right KPIs will help gain employees’ and team members’ support and align them with your goals. The employees’ focus can be improvised towards moving the business in the right direction, eventually leading to significant business decisions.