In 2015, LayerVault, which created version-control software for developers, shut down. Despite appearing, externally at least, to be a healthy startup, the company struggled to find product-market fit and had to close as a result.
When LayerVault failed, Kelly Sutton, co-founder of the startup, took stock of what went wrong and what the company might have done differently. One issue that stood out was that they didn’t define and track startup metrics.
“I think one of our biggest mistakes was not checking the key performance indicators (KPIs) regularly enough,” Sutton said. “They would have greatly helped us identify problem points in our business.”
Startup CEOs and founders (whether or not the startup was successful) can offer useful advice to help you identify your company’s key startup metrics. We pulled from our own experience and the experience of other startup executives to build this list of 16 KPIs you should be tracking to help your business succeed.
1. Activation Rate
Activation rate tracks the percentage of users completing a specific milestone in your onboarding process. For example, for a data dashboard company, a milestone event might be when a user connects their dashboard to a screen or Slack. Low activation rates could mean your onboarding process is confusing or needs to be optimized.
Onboarding should be a smooth process, because customers who are frustrated right away may be less likely to stick around. Seamless onboarding is especially important for startups that offer free trials. If a user struggles during setup, they are less likely to become a paying subscriber down the road.
Activation rate also helps you determine if you’re bringing in quality leads. A consistently low or declining activation rate may indicate that you are attracting low-quality leads who are not seeing value from your product. If this seems to be the case, you may need to adjust your sales processes to ensure you are appealing to an appropriate audience for your product.
Average activation rates vary widely, depending on what you set as your milestone. Consider looking at case studies, such as those offered by product analytics companies like Mixpanel, or at industry benchmarks to get an idea of what a “good” activation rate looks like for your milestones.
How to calculate activation rate
[ Total users who complete the set milestone / Total users who signed up or activated the service ] X 100 = Activation rate (%)
2. Active Users
Active users are the people who interact with your product, website, or application in a given time frame. Businesses typically track the number of daily active users (DAU) and monthly active users (MAU).
This startup metric tells you how many people are engaging with your product regularly, so you can gauge product stickiness. According to David Kofoed Wind, co-founder and CEO of Eduflow, every startup should track active users. In fact, it’s one of Eduflow’s two core KPIs.
“It’s common to see startups skewing numbers to demonstrate growth that isn’t that real,” says Josh Pigford, founder and CEO of Baremetrics. “For example, a chart may show 500,000 new users, but really 450,000 of those users never came back to use the app.”
If you look at only the total numbers of users rather than at active users, you won’t be able to tell how many people use your product regularly. A person who signs up and then never comes back would be counted the same as someone who logged in every day. In Pigford’s example, you might make business decisions assuming you have 500,000 users, but in reality, you have only 50,000 who engage on a regular basis.
Your company has to define what “active” means, based on your product and the actions you expect or want users to take. For example, you might count a user as active if they open your app or log in to the product platform.
How to calculate active users
First, define what an “active user” is for your product. Then, calculate DAU by adding up the number of unique active users in a single day.
MAU is the same as DAU, but for a different timeframe. To find MAU, add up the number of unique active users in a single month.
3. Average Sales Cycle Length
Average sales cycle length measures the length of time from initiating a sales contact to closing the deal. If you see dramatic changes in this metric, it might indicate a problem with your sales processes—especially if you notice your sales cycle getting longer.
This metric varies widely between different types of companies and products. Ecommerce or retail business, for example, will likely have a much shorter sales cycle than a SaaS business. Check competitor and industry benchmarks to see averages for companies similar to yours.
Your sales cycle length should remain relatively steady, but keep in mind that the metric may change. As your startup grows, and your sales team expands and improves, for example, your sales cycle may shorten.
How to calculate average sales cycle length
Total time between first contact and sale for all sales / No. sales = Average sales cycle length
To find your average sales cycle length, first work out the time spent on each sale. Then, calculate the average by adding up the total time spent on all sales and dividing it by the number of sales.
4. Burn Rate
Burn rate indicates how quickly your startup is spending money. It helps you calculate your cash runway and determine whether to cut costs or invest more in your business, such as in hiring or marketing and development.
Check your burn rate regularly to watch for fluctuations that might indicate unexpected expenses. Fred Wilson, partner at Union Square Ventures, said, “Assuming a constant burn rate can be very dangerous. Always know if your burn rate is going up or down and include that fact in your analysis.”
How to calculate burn rate
Total cash at start of month - Total cash at end of month = Burn Rate
Tracking burn is useful for monitoring spend and watching for sudden increases that might indicate unexpected expenses.
5. Cash Runway
Cash runway takes burn rate a step further and tells you how long your money will last. Startup metrics like cash runway help you see if you need to step up or adjust your fundraising efforts. It can also help you decide whether to be more aggressive with sales, cut expenses, or enact other measures to extend your runway.
Typically, businesses will calculate runway in terms of how many months their current cash balance will last.
Keep in mind that this is only a snapshot. Cash runway will change as your cash balance and burn rate shift. It also does not account for upcoming revenue currently in the sales pipeline. If you want a more accurate and reliable estimation, you should model your expected spend and revenue.
How to calculate cash runway
Cash balance / Monthly burn rate = Cash Runway
Monitor your sales pipeline alongside your current cash runway to get a more complete idea of your company’s current cash-flow. The pipeline will give you an idea of upcoming deals and potential revenue growth that would extend your runway.
6. Customer Acquisition Cost
Customer acquisition cost (CAC) is the amount you spend to gain one new customer. It includes marketing and sales expenses as well as salaries and overhead for teams involved with attracting new customers. CAC can help you see if your marketing and sales costs are too high or if you can invest more in those efforts.
CAC is most useful when broken down by channel. This will show you what specific marketing and sales activities have the lowest CAC and therefore are the most profitable. Knowing the most profitable channels can help you make a business case when prioritizing marketing and sales resources.
How to calculate CAC
Total sales & marketing expenses / New customer acquired = Customer Acquisition Cost
To calculate CAC by channel, use the same formula, but look at expenses and customers acquired through each specific channel rather than at total spend or new customers.
7. Customer Churn Rate
Customer churn rate is the percentage of customers lost during a given period. Josh Pigford commented that low churn indicates that current customers are happy and believe your product is solving a business problem. He also noted that offering added value to existing customers is less expensive than acquiring new customers.
For SaaS or mobile apps, a churned customer is one who cancels their subscription. Typically, churn rate includes only paying customers, not free trial or freemium-level clients. For ecommerce, churn rate looks at customers who fail to make a repeat purchase within an average time frame for the business (such as 90 or 120 days).
Churn can highlight ongoing business concerns, such as poor customer fit, product functionality issues, or problems with your pricing models. If left unresolved, these can be disastrous for a startup. It is an especially important metric for SaaS businesses because they rely on monthly recurring revenue (MRR) to set budgets and make hiring decisions. High churn impacts the company’s ability to plan effectively and grow.
The inverse of churn rate is customer retention rate, or the percentage of customers who stay with you over a set period. Retention rate shows the same basic trends as churn rate, but with a focus on the customers you’ve kept rather than the ones you lost.
How to calculate customer churn rate
[ Total customers churned this time period / Total customers at the start of this time period ] X 100 = Customer Churn Rate (%)
Businesses often calculate churn monthly, but you could also calculate churn rate by cohort—a group of customers who sign up or activate the product at the same time.
[ Total customers churned from cohort / Total customers initially in cohort ] X 100 = Customer Churn Rate (%)
Customer churn rate tracks only the numbers of customers churned. To look at revenue churn, see revenue churn rate, below.
8. Customer Lifetime Value
Customer lifetime value (LTV) is an estimate of the revenue any given customer will bring in over time. Compare it to CAC to see if you’re getting a return on your initial marketing and sales investment.
This metric may be more useful for mid- or late-stage startups than for early-stage. Once you have more long-term customers, you can more accurately predict the LTV for new customers, and your average LTV won’t be as skewed by high numbers of customers who churn quickly after signing on.
How to calculate LTV
The formula for LTV is slightly different, depending on the type of business you run. For SaaS businesses, the formula is:
Average monthly revenue per customer X Average customer lifetime = Average customer lifetime value
For ecommerce businesses, you would look at order value rather than monthly revenue:
Average order value X Repeat sales X Average retention time = Average Lifetime Value
These formulas are for basic estimates of LTV. Check out this resource to learn more about how to accurately model and calculate LTV, including information on looking at LTV for specific customer segments instead of as a total average.
9. DAU to MAU Ratio
The ratio of DAU to MAU looks at the proportion of monthly active users who engage with your product in a single day. It measures the stickiness of your product—that is, how often people engage with it.
For example, say on an average day you have 100 unique active users, and in a month you have 500 unique active users. Your DAU-to-MAU ratio would be 1:5, meaning that one out of five monthly active users come back to your product on a daily basis.
DAU-to-MAU ratio is a snapshot of user engagement, and it gives you more insight than just tracking overall numbers of users. Looking at the ratio rather than concentrating solely on numbers of either DAU or MAU, you get a better idea of how often people are engaging with your product. It shows how many of your regular users are coming back every day versus once a month or less often.
How to calculate DAU-to-MAU ratio
Average DAU / MAU = DAU to MAU ratio
To find your ratio of DAU to MAU, take the average DAU for a month, and divide it by the MAU for that month.
10. First Response Time
First response time measures how long it takes customer support staff to follow up after a customer submits a ticket.
Fast response times are vital for keeping customers happy and making a positive first impression on new clients. Not only that, but it’s also what customers expect. Zendesk found that a majority of survey respondents expected a company to follow up less than an hour after contacting the business, especially if phone or chat was used.
A quick response is especially crucial for young startups trying to build a customer base from scratch. The faster you follow up to solve a customer problem, the less likely they are to get frustrated and seek out alternative products.
The same principle holds true for sales. Having a short lead response time is vital for keeping a potential customer interested in your company and preventing them from seeking out competitors.
How to calculate First response time
Total initial response time for all tickets / No. tickets = Average First Response Time
To find the total response time for all support tickets, add up the number of minutes, hours, or days between the initial outreach from each customer and the time your support rep followed up.
11. Gross Profit Margin
Gross profit margin (GPM) looks at the difference between revenue and cost of goods sold (COGS). If you look at GPM for individual products, it can help you identify high-margin items you might want to promote in your marketing efforts. It can also show you if your COGS are too high.
GPM should remain fairly steady over time. If not, it might mean either expenses or sales (or both) are fluctuating more than they should. There are some exceptions to this, such as in seasonal businesses.
How to calculate gross profit margin
[Total revenue - Cost of goods sold] / Total revenue X 100 = Gross Profit Margin (%)
Calculate GPM weekly, monthly, or yearly, or by a combination, based on your average sales cycle length.
12. Lead Velocity Rate
Lead velocity rate is the month-over-month (MOM) growth of qualified leads in the sales pipeline. It can indicate future growth by giving you an idea of upcoming deals.
Compare lead velocity rate to the number of deals closed to get an idea of the percentage of qualified leads that become customers. The comparison will give you a better idea of how growth in the sales pipeline might translate to new revenue.
The speed at which your sales pipeline is growing also helps you gauge the success of marketing and sales efforts. Track changes in the rate over time, and watch for spikes or dips that correlate with new campaigns.
How to calculate lead velocity rate
[[No. qualified leads this month - No. qualified leads last month] / No. qualified leads last month] X 100 = Lead Velocity Rate (%)
If you are an early-stage startup, keep in mind that your lead velocity rate may grow dramatically at first because you are starting with a lower number of qualified leads. As your company grows, the rate will likely slow or become more steady, even as your numbers of leads rise.
13. Revenue Churn Rate
Revenue churn rate is the percentage of revenue lost in a set period due to downgrades or cancellations. It shows the amount of income lost through churn, which can help you determine if churn is coming from small or large accounts.
SaaS companies typically measure this KPI as monthly recurring revenue (MRR) churn because much of SaaS customer churn is from canceled subscriptions.
“Having our monthly churn percentages hanging over our heads would have kept those problems (and our customers' problems) more top of mind,” Sutton said in his discussion of LayerVault.
How to calculate MRR churn rate
Track gross MRR churn to see the amount of revenue lost through churn in a month:
[MRR churn for the month / MRR churn at beginning of the month] X 100 = Gross MRR Churn Rate (%)
If you want to see how lost revenue is balanced by new revenue from expansions, net MRR churn rate would be a better metric to track:
[[MRR churn for the month / Expansion MRR for the month] / MRR at the beginning of the month]] X 100 = Net MRR Churn Rate (%)
A powerful driver for growth is if you can reach negative churn by bringing in more revenue through expansion than you lose through churn.
Compare revenue churn rate with customer churn rate to see if you are mainly losing smaller or starter accounts or if your churn is coming from larger, longer-term accounts. The latter could indicate serious problems with your customer retention policies, whereas the former may indicate an issue with product fit for new customers.
14. Revenue Growth Rate
Revenue growth rate measures the month-over-month percentage increase in revenue. It is an indicator of how quickly your startup is growing. A high revenue growth rate can help you measure increasing demand for your product.
Similar to revenue churn rate, SaaS companies typically measure this startup metric as MRR growth rate.
Kofoed Wind lists revenue growth rate as one of the top startup metrics to track. It is still one of Eduflow’s two core metrics, along with MAU.
How to calculate revenue growth rate
[[Revenue this month - Revenue last month] / Revenue last month]] X 100 = Revenue Growth Rate (%)
Compare MOM and year-over-year (YOY) revenue growth rate to see the short- and long-term growth trajectory of your business.
Sign-ups are mainly a SaaS startup metric—adding up how many people have subscribed to your service. Compare sign-ups month over month to measure how demand for your product is growing.
One common mistake with this metric is tracking only total sign-ups overall instead of looking at monthly or daily sign-ups.
“The other mistake we made was to look at the cumulative number of sign-ups,” Kofoed Wind said, “a nice graph that always goes up - but doesn’t really tell you if you are getting anywhere.”
By monitoring daily or monthly sign-ups, you can track the growth in sign-up rate over time. Looking at total sign-ups, you will see higher numbers, but many people included in the count may or may not still be using your product.
How to calculate sign-ups
Add up the total number of new subscribers or registrations during a set time frame. Consider tracking free trial or freemium product sign-ups separately from paid subscriptions so you can see how sign-ups directly relate to revenue. You might also track total monthly sign-ups alongside your signup-to-subscriber conversion rate.
16. Viral Coefficient
Viral coefficient is the number of new customers or users generated by each existing customer. This metric is beneficial if you have referral programs or incentives in place, because it will help you gauge the success of those programs.
This metric is a powerful measure of customer happiness. If customers are recommending your brand to their network, they’re clearly getting value out of your product.
The main goal with a positive viral coefficient is achieving explosive organic growth. You can increase the odds of this kind of growth by including viral mechanisms into your product, such as built-in prompts encouraging current users to share the product or invite others to use it.
It can be challenging to track viral coefficient outside of an established referral program. One method would be to ask new customers if an existing customer referred them.
How to calculate viral coefficient
Total no. invitations sent X Invitation conversion rate (%) = Viral Coefficient
Invitations are shares, referrals, or other methods customers use to refer new people to your company. The exact form of an invitation depends on your company and the referral programs or incentives you have in place.
Your key startup metrics may change over time
While most of these metrics are useful for startups at any stage, you will likely need to prioritize different startup metrics as your company grows.
Paul Joyce, founder and CEO Geckoboard, saw this happen firsthand.
“When we first started tracking metrics in earnest they were chiefly product related. As we grew as a company, our understanding of how our product was adopted matured,” Joyce said. “This helped us dial-in product-related metrics and add other metrics as needed [such as] customer support and marketing metrics.”
Revisit your key metrics periodically to ensure you are still prioritizing the right ones for your company’s current stage of growth.
Looking for a way to keep your startup metrics top-of-mind at any stage? Check out our example dashboards, including this early-stage startup dashboard.
Originally published on 4 October 2016, updated on 16th December 2020