The stakes are higher for startups. Failing to reach their goals could end the company, which makes key performance indicators (KPIs) even more essential.
KPIs are the metrics that will best track your company’s progress toward its goals. So how should a startup choose which KPIs will best serve their company? While KPI’s vary between companies, certain KPIs are better for startups than others.
For example, metrics like Customer Lifetime Value (CLV) are more beneficial to established companies who want to forecast revenue or anticipate how much they should spend on marketing. While a startup could try to calculate CLV, they most likely wouldn’t have enough data to create reliable forecasts.
Instead, a startup may want to choose KPIs that focus on growth or monthly revenue, where a lack of historical data won’t affect the accuracy of forecasts.
Here are three great metrics your startup should know when considering its KPIs.
Customer Acquisition Cost (CAC):
Customer acquisition cost (CAC) refers to the cost of acquiring a new customer. Companies often use this metric to determine the most inexpensive ways to expand their customer base. Understanding and reducing your CAC is an easy and effective way of improving your profit margin. This is especially important early in the development of your company when cash flow is scarce.
Calculating CAC is a relatively simple process. Start by finding your total costs associated with acquisition, then divide this by the total number of customers acquired.
Acquisition costs can include:
- Employee salaries
- Marketing consultants
For example, if a company spent $1500 on social media marketing and acquired 100 customers, their CAC would be $15. With Causal, your company can track which market strategies attract the most customers for the least cost and determine the most effective way to grow your consumer base.
One of the best ways to lower a high CAC is to conduct market analysis to determine your company’s target market. Knowing your audience is essential to creating successful advertisements. Suppose you’re looking to bring in women over the age of fifty who own a dog. Instagram influencers would not be the best marketing strategy for that audience, but a popular pet blog could be a better fit. Causal can help your business conduct efficient and accurate market analysis, track your campaigns, and help you create the perfect marketing plan.
Month over Month Growth (MOM)
As its name suggests, MOM growth tracks the development of specific metrics. Growth is essential to a startup’s survival, making it a great potential KPI.
To calculate MOM, subtract your current month's revenue from the prior month, and divide it by two. Then multiply by 100 to get the percentage.
For example, if a first month's revenue of $10,000 is compared to a second month’s revenue of $13,000, we would see a 30% percent increase in MOM.
Growth is one of the most important predictors of a startup's success. That said, there is no universal target MOM a startup should aim for. The perfect MOM for your company depends on a wide variety of factors,real-time including location and industry. Market analysis can show your competition’s MOM, which may be a good starting point for formulating your company’s growth-related goals.
This metric is often used to calculate the effectiveness of business strategies. A good MOM means that strategy could be replicated for future success.
Burn rate calculates how fast a company is spending money. It’s arguably one of the most important metrics for a startup, as it can help determine whether the company will fail or thrive. This is calculated by taking into account all monthly expenses including payroll salaries, advertising, office spaces, business travel, website maintenance, insurance and more.
There are two different types of burn rates:
- Gross Burn Rate
Gross burn rate is the total amount of money spent in a month.
- Net Burn Rate
Net burn rate includes both revenue and expenses when calculating the money spent per month. For this reason, company’s tend to calculate net burn rate, instead of gross burn rate.
In order to calculate net burn rate, subtract the revenue from the expenses. Let’s say a company’s expenses per month is $10,000 and their revenue is $3,500. The net burn rate would be $6,500.
Net burn rate is used to calculate the startup runway, which is the amount of time your company has before they run out of money. For example, if your startup has $50,000 and your net burn rate is $10,000 a month, you would have a startup runway of approximately 5 months.
If your net burn rate predicts a short startup runway, you may want to consider cutting costs.
Here are some good ways to lower net burn rate:
Hiring is essential to new businesses, but overhiring is a great way to burn a hole in a startup’s very limited wallet. New hires have lower productivity until they are properly trained, which makes them a better investment once a company is financially stable.
Track your metrics
Causal is a fast and effective way to create effective models for your metrics, including your burn rate. Keep your team and investors on the same page without spending a fortune.
The more the merrier, isn’t the case when it comes to marketing. Efficient marketing can bring loyal customers and generate large amounts of revenue. Poor marketing can be synonymous with burning cash.
While pricing competitively is important, higher prices create more revenue. Adding additional services is another way you can increase prices while still ensuring your customer believes the cost is worth the product.
How can Startups use Causal?
Startups use Causal for everything from creating clear models for investors to calculating a startup runway. Our models are simple to create and maintain with features like built-in scenario analysis and interactive dashboards that update your team in real time.
Use Causal to track your startup’s KPIs and forecast whether your company will reach its goals.