How To Measure Your Startup’s Performance (Pt. 2)

In part one of this article series I explained why it’s so difficult to measure the performance of a startup company, why you should know the basis & who you do this analysis for. Now, let’s get into some facts & figures:

Startup Performance Indicators

There are four different areas that are especially important for any startup company. These areas are product/service, marketing, sales and finance. That is why I have chosen to use performance indicators from these four fields. Certainly, your own business’ focus depends on your specific business model.
Roughly, these four areas align with entire value-creation chain of your company. First you will need to have a product or service to sell. You will need to communicate this product or service to your target group. Then you will need to make an offer to your customer, which hopefully he cannot refuse. And last but not least the customer will need to pay the bill. I do realize that, in order to keep your customer happy, you will need to offer e.g. after-sales services. But this model is simplified in order to facilitate the understanding of the workings of KPIs, and hence leaves out these aspects.

Most of the times, when it comes to KPIs, the theory is quite simple, but implementing and actually measuring performance can be tricky in practice. That is why you will need to interpret each figure.

Three performance indicators will be chosen and explained for each of the four areas. Of course, this model can be extended by any other quantitative or even qualitative factor. This explanation illustrates the functionality of KPIs from a purely explanatory point of view. Every business owner should carefully define his own set of performance indicators. A lot of times it will make sense to define them together with your group of addressees.

#1 Product/Service

The first area of performance which is highly important to any new company is product or service (depending on your business model). The basic idea is that you will need to have a finished product or service in the first place in order to be able to run a successful business. Obviously, you can start marketing and even selling (see Tesla’s new Model 3) your product before even having finished it, but on the long-run you will need to be able to sell a finished product. Therefore, these performance figures indicate the status of your product and the readiness of your organisation.

Time

The first factor regarding your product or service is time. When you have set up your business plan you will have estimated a period of time to finish the product or set up the service. Now you will have to keep track of your development status: What progress has been made? Is it still within or has it already exceeded schedule? In case it takes more time than expected, you will need to think about adapting your costs.

Personnel

The second part is your personnel structure and their workload. If you are a solopreneur then you can answer this question instantly, but whenever you are two people or more, e.g. co-founders or employees, you will need to keep track of their workload.

Capacity

Capacity is closely related to personnel. It regards both, physical capacity, e.g. in production or in your office, and knowledge capacity, e.g. skills. In order to develop your business it is necessary to have room for growth. You will need the right skills.

These KPIs will not give you an insight on the product or service itself, e.g. quality or customer acceptance. Instead they will give you an insight on the availability of your product or the readiness of your service.

#2 (Brand) Marketing

Once you have a finished product or service you will need to bring your idea out on the road. In order to present a specific added value, you will need to communicate this value to your target audience. This communication does not only include campaigns, but also the brand itself and the awareness you have achieved so far. You will need to reach your audience with your brand message. Otherwise your marketing will not be successful. Even though it is not that easy, the goal is to measure the performance of your marketing efforts.

Contacts

The first figure is the number of interactions of your brand or idea with your target group (potential customers). It is not very easy to come up with this number, but if you start a campaign for example you can count the number of people it reaches. If you are on a trade fair you can count the number of visitors on your booth. Or if you have a retail store you can count the pedestrian frequency on the street in front.

Online Interaction

It is much easier to count interactions online, because you will probably have a lot of data, such as website clicks, social media likes etc. The problem here is that you will not see the intention of the interactions. Has somebody clicked on your website “by accident” or were they really looking for your product/service? On your website, for example, you can cross-reference the number of interactions with the duration of the visit. But this is still not as significant as a direct contact.

Cost Per Potential Customer

You should always know how much money you are spending on each potential customer. It is definitely nice to have a wide reach, but if every contact costs you more than you can earn per product sold, you should rethink your strategy. It is said that a customer will need to see your brand (or your offer) a number of times before he acts on it. That is why you need to present your brand to him on a constant basis.

#3 Sales

The next area of measuring is sales. The sales process needs to be vigorously monitored as the money is earned here and mistakes can cost you a lot of money and sometimes even threat your entire business. Of course, your money will be earned with the whole business, but sales is the area where the money actually changes hands from your customer to you.

Leads

The first figure is the number of people who are honestly interested (prospective customers) in buying your product or service now or in the near future. Often you will need to estimate, if a prospective customer wants to buy in the future (possibility >50%). The estimation needs to be taken seriously as this is an early indicator for future sales.

Customers

The number of customers gives you an insight, whether your product is accepted or not. You should split this number up in old and new customers. That way you can see, if your customer base is still growing. You should include paying as well as non-paying (beta) customers, because they are also very important for rapid feedback.

Transactions

The number of transaction helps you to separate days that are more important from less important ones which in turns helps you with future planning. Here you can also include the average value of each transaction. In a perfect world, from an entrepreneur’s point of view, both figures will equally grow. In reality the number of transaction will be growing, but the average value can vary quite intensely. With this KPI you might be able to find a reason or a pattern behind this behaviour.

As stated above, herein you could also measure factors from after-sales service: How many customers need attention? How many complaints are there? But these data will only be available once you have sold something and are indicating customer satisfaction or loyalty.

#4 Finance

Cash is king. This simple saying summarizes the importance of your financial situation in one sentence. Entrepreneurial activities are always connected with financial risks. Invested capital might be lost in case of failure. This is why any provider of capital, may it be an investor or a lender, an institution or a friend, will have a special interest in this kind of performance indicators.

Cash

The first and for the survival of your company most important indicator is the current cash position. It can easily be retracted from your bank accounts adding cash in-hand. Very important is the change from period to period. If you experience a high cash-burn-rate – higher than budgeted – you will need to take countermeasures. It is important that your current cash position can cover all outstanding invoices and other current liabilities.

Revenue

Revenue is the fiscal success of your sales team. It should be kept up to date on a year-to-date (YTD) or month-to-date basis. That way you will always have an overview and you can forecast future cash inflows.

Cost

In order for cost to make sense, it needs to be set into relation with your current revenue and your current cash. It is necessary to include all fixed and variable costs per period, e.g. month, and then check it against your revenues. At the beginning of your company costs will exceed revenues by far, but it is necessary to keep your expenses in line with your budget.

Please remember that these are only three of many important financial KPIs. In order to get a quick overview, these three may be sufficient, but if you want an in-depth insight, you will need to set up a lot more than these.

Conclusion

The main question is, whether measuring key performance indicators in a startup makes sense. And the simple answer is yes. When you start a new company it is often hard to keep track of your performance. You will be working hard and it is not always easy to keep the overview. Introducing key performance indicators can and will help you operate your business. It enables you to react instantly when you notice a difference between your performance and your budget. My tip is to install a dashboard (e.g. in Excel) for your company that contains all of your most important performance figures in one table and/or graph. This dashboard should be set up the simplest way possible (KISS principle). This way you and all the other addressees will have an easy access to the performance of your company at all times.

 

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