Once you have ironed out the teams and traits of your business, you will want to start tracking and acting on your Key Performance Indicators (KPIs). If you aren’t tracking your KPIs, you won't know where you are succeeding and failing. If you don't know how your business is doing, you won't know what your next actions need to be, which leads to wasted resources and a failed business.
What are KPIs?
KPIs are metrics that measure how well a business is meeting its objectives, so they will vary based on your business type. For instance, an app might track unique logins per day, while a restaurant might choose to measure sales per day.
To help you select your KPIs, let’s take a look at the two base metrics that every business needs to track: revenue and business costs (or burn rate). You will also want to analyze which metrics have a direct impact on your revenue and business costs.
For example, a mobile app might find that total downloads do not have a direct relationship to revenue, but the activity per user does. Thus, you would prioritize tracking user activity. To go a step further, you would try to find ways to increase user activity, as it would mean a direct increase in revenue. Don't forget to double-check that your efforts are not increasing your business costs more than the revenue they generate.
Alternatively, a restaurant might find that internet advertising has a direct impact on their revenue through an increase in online orders. From this, they might think to only increase their marketing spend to grow revenue. Taking a deeper look at their marketing, they would see that tracking the conversion rate of the ads is another KPI they need to track, as it shows the effectiveness of the ads and helps to better predict revenue when paired with other KPIs. The conversion rate is the percentage of people that are turned into paying customers from the total audience
Some other KPIs that might help you keep track of your business are your customer's Lifetime Value (LTV), Customer Acquisition Cost (CAC), Churn Rate, and Burn Rate.
LTV = (Revenue per User * Gross Margin %) / Customer Churn Rate
CAC = Total Cost of Generating Revenue / The Number of Customers
Churn Rate = Revenue lost from a cohort in a time span / Recurring revenue per time span
Burn Rate = Total business costs per month
For more info on this topic, check out the 2019 Launch Festival presentation by Allen Chen, the CEO of Fitbod.
The Growth State Machine
In the podcast, This Week in Startups episode 994, All Turtles CEO Phil Libin goes through his "Growth State Machine." This flow chart is meant to help you visualize the journey your customers go through and what KPIs you should be tracking for each step. Furthermore, you can start figuring out what value your KPIs need to be to ensure business success. See Figure 1 to see what the Growth State Machine looks like, and check the resources section for a link to the full video explanation.
The Growth State Machine has 5 user buckets: Never Used, First Time User, High-Value Users, Low-Value Users, and Inactive Users. The lines and loops are called transitions. Use the state machine to map out the overall go-to-market strategy and focus on certain transition lines that are important for the situation your startup is in. By focusing on the transition lines, you will see what efforts need to be made and what KPIs you need to analyze.
Figure 1: The Growth State Machine from Phil Libin
Using the Growth State Machine
Most businesses focus on transition line 1, as this is where most of the tools and conversations are centered, but this is usually not the place that has the most impact when you are starting out. For instance, the things that affect line 1 are the typical Sales and Marketing with tools like PR, SEO, Word of Mouth, Channel, Etc. These are the easiest concepts to wrap your head around and the easiest to throw money at and track with ratios and KPIs.
Though as a startup, the transition line that has the most impact on success is line 2. Line 2 is when first-time users transition to inactive users. Having a high “bounce” is essentially saying you enjoy throwing money away since all of the money you spend on getting users to your product is wasted, as no one stays long enough for you to return your investment. In typical acronyms, your CAC to LTV ratio will be terrible, as you will spend money getting people to your product and have a very low customer LTV
L et's use the state machine to help guide your decision on how to spend money and where. You can see the path your users are taking, thus, the point of line 1 is not to focus on your CAC and LTV, but where they go. With the focus on line 2, your goal for line 1 is actually to get enough users to be able to measure and get statistically meaningful data on how to improve line 2 and reduce your bounce. So once you get enough users to get statistically meaningful data on line 2, you can shift your focus and spending to line 2 and make sure your bounce is healthy.
We should also clarify that retention is the combination of both bounce (line 2) and churn (line 8 and line 10). This clarification is important since the reason people bounce and churn are very different, and if you are only measuring retention, you can't make clear judgment calls on the tests you are running.
With a better understanding of what KPIs are and the Growth State Machine, you can start using them to track your business and prioritize your goals.
"If you don't collect any metrics, you're flying blind. If you collect and focus on too many, they may be obstructing your field of view." -Allen Chen, the CEO of Fitbod
Additional Resources and sources:
- Unit economics for startups
- Unit Economics of a Customer
- episode 994 of This Week in Startups, All Turtles CEO Phil Libin goes through his “Growth State Machine.”
- Book: “Straight Talk for Startups” by Komisar and Reigersman.
- Book: “Agile Scrum: Your Quick Start Guide with Step-by-Step Instructions” by Scott M. Graffius,
- 2019 Launch Festival presentation by Allen Chen, the CEO of Fitbod:
Video link: https://www.youtube.com/watch?v=Y5H22EVPwc8
Allen’s presentation covered the growth metrics that matter for a SAAS (Software as a Service) company. Even if you are not building a SAAS company, it is definitely worth watching the full video as the lessons can definitely help you regardless of your monetization model.
Some big takeaways from this presentation are:
Growth is a function of the product, not the marketing.
Not all metrics are meaningful to your business model. For instance, Allen goes through how they were able to find the “true DAU (Daily Active User)” metric for Fitbod and why the standard DAU was not a good metric for a consumer SAAS company.
The importance of finding a true DAU is that it will let you see your actual churn and the stickiness of your product.
Understanding your churn will allow you to project your CAC (Customer Acquisition Cost) and your LTV (Life Time Value).
The final takeaway is that by being able to project your DAU, CAC, LTV, and Churn, you are able to then see problem areas before they happen and make the necessary decisions to proactively handle them.