One of the more difficult aspects of running a successful business is knowing how to define “success” in the first place. This might strike you as a bit obvious. Isn’t success simply related to how much money you make versus how much you spend? Sort of, but it’s not quite so simple. A sustainably successful business must go deeper, defining its key objectives at multiple levels to ensure performance and strategic alignment across all aspects of the business. This is where KPIs come in.
A KPI, or key performance indicator, is any metric that helps to explain how effectively a business is achieving its objectives. As such, a KPI is not very useful if it is not tied to a specific business objective. So, before you start to think about which KPIs are the most important to track for your business, think about the specific goals you’re trying to achieve.
These goals can (and should) change over time. In the short term, a young startup will probably be less concerned about generating revenue than it is about growing its customer base. Getting more customers to adopt and use your brand-new product may be more important than maximizing the lifetime value (LTV) of each customer — though that balance may shift later.
On that note, let’s review seven of the top KPIs businesses use to track their progress on a monthly, quarterly, and annual basis. We’ll start with a note on what separates a good KPI from a less useful data point.
Unless you want to set yourself up for failure, you’ll want to agree on a set of KPIs that adhere to realistic business outcomes. A startup in the hyper-growth stage, with no reliable way of achieving net profitability on a per-customer basis in the next year or so, will likely do itself no favors by focusing solely on profit margin as an indicator of success.
A bigger mistake than focusing on the wrong KPI for your current business stage, however, is focusing on a KPI that doesn’t make sense at all. For example, we’ve seen some businesses set KPIs along the lines of “Improve customer satisfaction by X%.” That sounds good in theory, but what does it even mean? Without a clear way to measure progress and a specific directive for your team, a KPI quickly becomes a useless talking point.
To that end, here are three qualities all the best KPIs have in common:
On that note, let’s review some of the top KPIs businesses use to track their success.
Customer acquisition cost (CAC) measures the cost of acquiring a new customer. It’s a key metric that helps you understand how effectively your sales and marketing teams are bringing in new customers.
To use an example, say you spend $10,000 on a marketing campaign that nets you 100 new customers. To calculate the CAC for your marketing campaign, you would simply divide the total marketing spend ($10,000) by the number of new customers acquired (100), for a total CAC of $100.
Whether that’s good or bad depends on business-specific factors. But as a general rule, businesses try to keep their CAC as low as possible. Start by understanding your current CAC and how it has changed over time. Then, set a quarterly target to lower it by a realistic dollar amount.
What’s even more cost-effective than acquiring new customers? Retaining the ones you already have. That’s why many businesses opt to track customer retention rate (CRR) as a core KPI.
This metric is represented as a percentage, but it’s not as straightforward as saying, “We have X% more customers now than we had at the beginning of the quarter.” Remember: You’re looking for how many existing customers you retained from the previous period — not simply how many you’ve added. It’s a subtle distinction, but isolating CRR can be a more effective way to predict future revenue and profitability.
To calculate CRR over a given time period, first subtract the number of new customers acquired during the period from the total customers you have at the end of the period. Then, divide by the number of customers you had at the start of the period. You’ll end up with a decimal point, which you can multiply by 100 to determine your CRR.
Churn rate is another KPI that addresses customer retention, though it focuses on the other side of the coin: the percentage of customers who stop doing business with you. (These are called “churned” customers.)
Just as a dairy churn involves shifting and turning over cream, a customer churn signifies the loss or turnover of customers, which can be disruptive to your company’s stability. A high churn rate indicates that you may not be doing enough to satisfy your customers or address new market realities, like a competitor who’s deliberately undercutting you on pricing.
To calculate churn rate, divide the number of lost customers by the total customers you had at the start, then multiply the sum by 100.
Lifetime value (LTV) is perhaps better suited as a KPI for businesses that have been around for a while and understand the typical lifecycle of a customer. LTV is an average that predicts the total revenue expected from a single customer account, and a shrewd business can use it to assess how much money should be allocated toward customer acquisition and retention efforts.
Because LTV averages out your entire customer base, you shouldn’t think of it as representative of any one customer’s behavior. Many customers will be worth less to your business than the average LTV indicates, and many will be worth more.
All KPIs are time-constrained in some way; this one just happens to have that feature baked into the name. Monthly recurring revenue (MRR) measures the predictable and recurring revenue elements of your business — the ones that you can expect to repeat on a month-over-month basis.
This KPI can help you better understand the rate at which your company is scaling and predict future growth. It can also help you interpret sudden revenue spikes or dips caused by unpredictable elements and not by some core flaw in your business model.
Generally speaking, there are two major milestones in the customer acquisition journey. The first is the acquisition itself — in other words, how do you get new customers in the door? Marketing and sales teams care very much about acquiring as many customers as they can, which can mean getting them to sign up for an account, visit a website, open an email, etc.
The next crucial step is getting those customers to convert, or to perform some action that turns them into paying or revenue-generating customers. The ratio between acquired and converted customers is the conversion rate, and it’s a crucial metric for assessing the effectiveness of your marketing strategies.
Conversion rate is expressed as a percentage. To calculate it, simply divide the number of conversions by the total number of acquired customers, then multiply by 100.
There are two major finance KPIs you’ll want to keep an eye on: gross profit margin and net profit margin.
Your gross profit margin is the difference between the revenue you bring in and the cost of goods sold. It’s typically expressed as a percentage of revenue. Gross profit margin can help you assess how efficiently your business produces and sells its products or services.
Your net profit margin involves a few more inputs. It is the percentage of revenue that remains after you deduct expenses, taxes, and any additional costs. A high net profit margin can be an especially good sign to investors and stakeholders, as it suggests that your company is in good financial health.
There are dozens of other KPIs we could mention here, but many of them apply more to specific functions or roles within your business.
For example, your payroll team may track its own set of KPIs that include payroll accuracy, processing time, employee overtime percentage, and more. All of these are important for helping that team assess its performance, but they may not be so relevant to members of your marketing and engineering teams.
A well-organized business should have top-line KPIs it tracks to determine its overall health and stability. But it should also empower teams to create their own actionable KPIs that ladder up to the company’s overall goals.
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But a business can’t scale effectively without clarity around its goals and KPIs. That’s one of the reasons why we’re launching our latest product, Omi. Sheets is our latest way to help you track and automate your business payments from one place, giving your finance team insight into the metrics that matter the most. For a demo, send an email to hello@tryomi.com to learn how Omi can help your business.
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