Entrepreneurs: Measure the right KPI when it comes to your Start-ups
The need for measurement is most evident when a start-up competes with itself. This is the best sort of competition for two primary reasons. Firstly, doing better than you did the previous year is a sure sign of growth. Secondly, self-competition is the perfect stimulus for self-motivation. Comparison with an external entity can sometimes have a damaging effect. But, competition with oneself creates a drive to get better and leaves no room for excuses.
The most elementary questions that cross our minds, when we think about measurement are why and how. I urge you to answer these questions before you read on.
Why should I measure?
Right from marking one’s height on the wall as they are grown from a toddler to an adult, to using a stopwatch to measure Usain Bolt’s speed in training, measurement is the key to improvement. If you are unsure of what to beat to get better, what are you competing against? You need a benchmark to measure progress. A performance index at the end of each year is the best benchmark for the next, considering a constantly growing start-up.
How should I measure?
There are many ratios which act as progress indicators. They can be classified under the broad category of Key Performance Indicators.
KPIs are vital to the growth of a start-up. There are numerous KPIs that can be used to measure every facet of your business. However, using every available KPI can be illogical and redundant. Picking smart KPIs for most relevant measurement is truly a challenge. The choice of KPIs for any business depends on the industry. The rest are specific to the way each business is modeled and managed.
Here, we will deal with the most common KPIs, which hold good for any start-up to accelerate growth:
- Customer Acquisition Cost:
Every business – product based or service driven – needs customers to sustain operations and consequently grow. But, how efficient is your approach to acquiring customers? This can be answered when you calculate the average resources spent on gaining a customer. When compared with customer retention rate and attrition rate, the customer acquisition cost makes more sense and acts as a good indicator to know if your start-up is improving its assets or bleeding finances without apt compensation.
- Lifetime Value:
Over time, the term brand loyalty has become so cliched, that its significance in the business world has faded. However, brand loyalty could be the difference between a sustained business and one that looks set to end before it can establish itself in the market. Customer lifetime value is the net value of all transactions, across the entire period of an average customer’s relationship with your business. The higher this number, the better for your business, because it significantly reduces the stress placed on finances by the customer acquisition cost. It also justifies the resources spent on acquiring a new customer.
The ratio of lifetime value to customer acquisition cost is known as the golden metric in business. When calculated, a number under three is considered to be poor. However, until a start-up establishes itself in the market, it is hard to acquire a customer following or brand loyalty. Keep your eye on this number to ensure that it rises with every passing year, but don’t get disheartened if your golden metric starts off below 3.
- Profit margin:
The bottom line of every organization is directly affected by profits margins, making it the easiest to grasp of all metrics. Simply put, the profit margin is the difference between the selling price and cost of production. Its simplicity should not tarnish its importance, as this metric is a very good indicator of sustainability and growth potential of a start-up.
There are dozens of other KPIs that are specific to varying industries. Some KPIs are used to measure your business against industry standards or leaders. Though these may seem a bit much for budding start-ups, it’s never futile to measure KPIs and device strategies for improvement. These smart tips should come in handy while selecting the right KPIs for steady business growth:
- The salmon strategy:
It is fascinating to watch salmon swim upstream, against the current, to spawn in their home stream. Sometimes businesses must take a page out of the salmon’s book and work backward to solve certain problems. The most notable quandary faced by start-ups is the choice of KPIs. Sometimes its easier to choose KPIs based on the data that is readily available to you. A balance sheet is mandatory for any organization, making most of the primary KPIs easily attainable.
From over two decades of experience, I have noticed that the hardest KPIs to measure are the ones that are related to marketing. With the advancement in technology, it is relatively easier to keep tabs on your marketing team. The use of link management platforms is a novel method to erase obscurity and measure marketing campaigns purposefully. The analytics on these platforms are so comprehensive that precision is never compromised. Social networks, such as Facebook, provide their analytics but do not explicitly state the number of bots that have clicked on your link. Invariably your measurement is flawed.
- Split the responsibility:
Division of labor, based on one’s skill set is the best way to tackle any challenge. In keeping with this axiom, measurement of KPIs is often split into few sizeable chunks and assigned to particular teams. Not only does this ease the burden of measurement, but ownership also ensures that these teams take upon themselves the onus of improvement. Such motivation is a key ingredient to the growth of any start-up.
- Measurement without action is futile:
The sole purpose of measuring KPIs is to improve upon existing business tactics. Without such impetus to improve, measurement is like a mirage of success. Be it to up the bottom line or expand the business, the need for progressive action is only surpassed by adept execution.
- Concentrate on the most important KPIs:
KPIs vary in importance depending on the type of business and strategies employed to achieve business goals. The most important KPIs for a start-up may be the customer acquisition cost, whereas an established brand, in the same segment of the business, may consider customer lifetime value to be more significant than the rest. Whatever be your elixir to accelerated growth, the right KPI must be measured and monitored on a regular basis to stay on track to success.