Which KPIs to Measure for Different Types of Startups
Sales — 8 min read
Key performance indicators, or KPIs, are quantitative metrics that reveal something significant about the health of your business. Startup KPIs can be grouped into broad categories like revenue or usage, but there isn’t a universal set of “northstar metrics” that every startup has to use. It’s up to every founder individually to drill deeper into the broad categories and select the right metrics to indicate whether or not their startup is moving closer to its goals.
It’s usually best to choose a main KPI to focus on and a few related, supporting KPIs to help fill out the picture. What these KPIs should look like depends heavily on what kind of startup you have and what your goals for it currently are.
Consumer startups typically benefit most from tracking straightforward financial metrics like revenue, retention, and customer acquisition cost.
Revenue is the financial value generated by actual sales of products or services. Revenue is distinct from bookings, which reflect the total value of a contract between a company and a customer.
For consumer startups, revenue is a critical indicator of the viability of your business model. It also provides much needed insight into whether or not your business is on track to meet its growth goals. Investors typically look at revenue or projected revenue when gauging how much traction a startup has.
Retention measures the percentage of customers your startup keeps over a period of time. It’s the other side of churn, which measures the percentage of customers your startup loses over a certain period of time. If you lost 10 customers this month and you had 200 customers at the beginning of the month, you have a 95% retention rate or a 5% churn rate. Retention and churn can also be measured in terms of revenue instead of customers.
Retaining customers is far preferable to constantly burning through customers and acquiring new ones because it’s much more expensive to acquire a new customer than to retain an existing one. Loyal, long-term customers also tend to make larger and more frequent purchases than new customers do because they’ve had more time to learn the value of your startup’s products or services.
Customer acquisition cost and payback period
Customer acquisition cost (CAC) measures the total financial investment required to acquire one new customer. CAC is calculated by dividing total marketing expenses during a specific period of time by the number of new customers acquired during the same time period.
You shouldn’t include organically acquired customers when calculating CAC. If you do include organic acquisitions, you won’t get an accurate picture of how effectively your paid marketing efforts are working. However, it can be valuable to calculate a blended (paid plus organic) CAC for comparison.
Payback period is closely tied to customer acquisition cost — it’s the amount of time it takes your startup to generate enough revenue to make up the cost of acquiring a customer.
Marketplace startups should focus on revenue-based KPIs as well, but the marketplace model requires some unique considerations.
Gross merchandise volume
Gross merchandise volume (GMV) is the total financial value of all the merchandise that’s bought and sold on your marketplace over a given period of time. This number does not represent the amount of revenue your startup receives, but it is a useful metric for measuring the size of your marketplace.
Revenue and take rate
For a marketplace startup, revenue is the portion of the GMV that the marketplace receives. Marketplace revenue primarily comes from the fees the marketplace charges buyers and sellers to use the platform. When stated as a percentage of GMV, not as a monetary value, the marketplace’s share is called the take rate.
Marketplace startups need to watch customer retention for many of the same reasons consumer startups do. Most importantly, high customer retention signals that your marketplace is engaging users and developing traction. Once again, retaining customers is far better for long-term value than continually acquiring and losing low-value customers.
However, marketplace startups need to balance two kinds of users: buyers and sellers. Typically, sellers are easier to retain than buyers. It’s important to track retention for each group individually as well as combined. Measuring GMV retention instead of user retention is one way of gauging whether your marketplace as a whole is growing or not.
Customer acquisition cost and payback period
Customer acquisition cost is more complicated for a marketplace startup than a consumer startup. There are separate costs associated with acquiring buyers and sellers and each need to be represented separately in your metrics, not conflated. The ideal CAC and payback period for your startup is likely very different for buyers and sellers, so it’s important to distinguish between the two when you’re analyzing CAC.
B2B SaaS Startups
The best KPIs for B2B SaaS startups are based around usage as well as revenue.
Annual recurring revenue and monthly recurring revenue
- Annual recurring revenue (ARR) represents value generated repeatedly on a yearly basis. A common example of annual recurring revenue is the revenue generated from a yearly subscription. If a company sells a two year subscription for a total price of $14,000, the ARR for that sale is $7,000.
- Monthly recurring revenue (MRR) works the same way as ARR, except it represents revenue sources that recur on a monthly basis.
ARR and MRR are two of the most important revenue KPIs for SaaS startups since SaaS products are sold on a subscription basis.
Customer retention is especially important for B2B SaaS startups because customers aren’t spending all their money on purchases up front. The real value lies in the long-term recurring revenue the customer generates throughout the life of their subscription. Retaining customers is the key to realizing that value.
On the other hand, a high churn rate can be a death sentence for a young B2B SaaS startup. When a customer churns, you only get a small percentage of the lifetime value that customer initially represented.
In the B2B SaaS industry (like in most industries), retention and churn are calculated as a percentage of total customers retained or lost during a period of time. However, SaaS companies in particular often see higher churn rates among newer customers than among long-term customers. Segmenting retention and churn rates by customer maturity can give you a more honest picture of the health of your B2B SaaS customer base.
The number of subscribers you have can also be a useful KPI because subscribers represent active sources of recurring revenue, not one-time customers who may or may not make future purchases.
Expansions revenue is additional revenue that’s generated beyond a customer’s normal subscription. Your startup’s expansions revenue is not only an important component of your overall revenue calculations, but it's also a useful indicator of customer satisfaction. Customers who are using and benefiting from expansions are more likely to be loyal customers in the long run.
Some common sources of expansions revenue include:
- Upselling - when a customer moves up a pricing tier.
- Cross-selling - when a customer makes additional purchases.
- Add-ons - when a customer purchases additional recurring services that were not included with their original subscription plan.
Financial metrics like revenue are less important for social apps. Instead, social app startups should focus almost entirely on usage metrics.
Your social app’s number of active users is a fundamental KPI. But what’s the best way to measure active users?
The usual contenders are daily active users (DAU), weekly active users (WAU), or monthly active users (MAU). The best one to track depends on how often you hope your most engaged user would be using your app. For most social apps, daily use is the goal, so measuring DAU is best for tracking that goal. However, measuring WAU and MAU is still useful for identifying trends and making projections.
App store ratings
A high user rating in the app store looks great from a marketing perspective, and ratings can serve as uniquely valuable performance indicators because they represent a direct source of feedback from users. However, many users won’t leave a rating at all, so be careful not to let a minority of vocal users monopolize your viewpoint.
Before you can measure engagement, you need to decide on a set of actions that indicate engaged users, such as liking a certain number of posts or spending a certain number of minutes viewing content on your app. Tracking how frequently users are taking these desired actions can help you understand engagement levels among your user base.
Your app’s retention rate is the percentage of users who continue to use the app during a specific time period. Retention rate and number of active users both typically give you a more accurate picture of your user base than total number of downloads because it's common for app users to churn very quickly.
For startups that design and produce physical technology assets, the number and quality of letters of intent (LOIs) and signed contracts your business secures can be excellent performance metrics.
Letters of intent
A letter of intent is a preliminary written agreement between a business and a client outlining the terms of a proposed deal. Letters of intent are not usually legally binding. LOIs are early indicators of likely revenue sources and prove to potential investors that your startup can generate interest.
Signed contracts are even better than letters of intent because they represent an actual source of revenue. Unlike LOIs, signed contracts are usually legally binding.
Life Sciences Startups
The best KPIs for life sciences startups focus less on revenue or usage and more on the development of the product itself.
Research and development
Startups developing new drugs or biotech solutions sometimes face long research times and enormous up front development costs. Your life science startup needs to be able to demonstrate to potential investors that your research and development expenses are yielding something valuable in the form of data, a product prototype, or some other measurable outcome.
Cycle, TAKT, and lead times
Cycle, TAKT, and lead times each provide you with a different perspective of your life sciences startup’s efficiency.
- Lead time - the average amount of time it takes to produce one unit.
- TAKT time - the average amount of time between the start of production of one unit and the start of production of the next unit.
- Cycle time - The average amount of time between the company’s reception of an order and the order’s delivery.
As you select and track your key performance indicators, it’s important to keep your goals in sight. Measurement for measurement’s sake does no good. The startup metrics you prioritize should be directly linked to desired outcomes for your business and the data you gather should provide insights about how close you are to hitting your targets. Until you turn those insights into informed action, your KPIs won’t provide any tangible benefits for your startup.