It is critically important for the founders of a company to intimately understand the company’s key performance indicators (KPIs). Founders cannot hope to grow a company in any meaningful way without an almost obsessive focus on its KPIs.
Why? Because KPIs, if constructed correctly, give management and potential investors a cold, analytical snapshot of the state of the company, untainted by emotion or rhetoric. This focus must not be limited to the KPIs themselves, for they are merely measurements of outcomes. We look for founders to have an understanding of what levers can be pulled and what tweaks can be made to improve the business, which will then be reflected in its KPIs.
The focus should not be on the KPIs themselves, but the meaning behind them and knowing what impacts each one.
Let’s review some of the KPIs that are important for founders to thoroughly understand and for which they should have a strategy, or set of strategies, for optimizing. Please note that some KPIs are not relevant to some types of businesses. Finally, I am not going to go into very much detail on each metric and how to calculate it as (a) that is beyond the scope of this article, and (b) that information is readily available from other sources.
Customer acquisition cost (CAC). CAC is the amount of money you need to spend on sales, marketing and related expenses, on average, to acquire a new customer. This tells us about the efficiency of your marketing efforts, although it’s much more meaningful when combined with some of the other metrics below, and when compared to competitors’ CAC.
Acquiring new customers is one thing, but retaining them is even more important. Your customer retention rate indicates the percentage of paying customers who remain paying customers during a given period of time. The converse to retention rate is churn (or attrition), the percentage of customers you lose in a given period of time. When we see high retention rates over an indicative time period, we know the company has a sticky product and that it is keeping its customers happy. This is also an indicator of capital efficiency.
