Key Performance Indicators to Understand

KPIs

Goal of post is to get a good understanding of what KPIs are and why they are important to a company.
What are the most common KPIs?
How to interpret them and benchmark?

“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”
-Sun Tzu, The Art of War

Companies are facing ever-changing environments and the deluge of data can provide a lot of insights, but also comes at the cost of getting a lot of noise. A successful company is one that can learn to focus on actions within its control while looking for opportunities to grow or reduce risk. Key Performance Indicators (KPIs) are measurements that gauge a company’s long-term performance and are measured against their internal targets, objectives, or industry peers. KPIs are important because it focuses on long-term goals and is the most vital metrics to ensure growth. As a company grows, urgent matters often become the focus at the expense of what is important. The Eisenhower Matrix is a great mental model to prioritize what activities to focus on. KPIs help people focus on what is the most important.

The Eisenhower Matrix is a mental model to help decide on what to prioritize by urgency and importance.

KPIs are often referred to as key success indicators because they determine what will make a company successful or not. Choosing the appropriate KPIs will depend on the type of company, industry, and how competitors behave. Below we’ll go over the right way to create KPIs. The following paragraphs show the reasoning behind having KPIs, feel free to go directly to the KPIs To Understand section.

Know Thyself

Companies have natural strengths and weaknesses. Knowing what they are is the best way to compete in an often global marketplace. The competitive advantage is the reason why a company was started in the first place. For example, WayBetter was started because the founders saw office weight-loss competitions help the participants, but there was no option for those in companies who don’t participate. The competitive, social aspect of the weight loss competition could help many users across the globe by making it available as an app. The natural competitive advantage was that many people are missing out on a fun, social way to become healthy because it was only available to the few.

Know your enemies

The problem that many new companies face is knowing who the true competition for their product. Finding competitors when the product is more of a commodity like transportation is simple: Uber vs Lyft vs cabs. They all provide a way to get to a destination but offer different accessibility, affordability, and quality. In the case of Netflix vs Blockbuster, sometimes the competition is that is not obvious until it is too late.

Knowing why your customers use your service is a great way to learn who your potential competitors will be. If weight loss is their number one goal, every diet, exercise, and health company is your competitor. This puts the importance of being able to differentiate yourself outside of just price.

Understand the land

The environment looks at all aspects that affect your company that you cannot control like laws, consumer tastes and spending power, and technological advances. These are constantly changing and can provide an opportunity or a big risk depending on how you understand and react to the changes. Reading relevant news and networking with other companies offer an easy way to get insight.

The diagram is a circle, with a core that is labeled, and sections surrounding the core that are labeled. Outside of the circle is the external environment, which affects the contents of the circle. The core is labeled as, Internal Environment; entrepreneurs, managers, workers, and customers. The sections surrounding the core are as follows; technological, and economic, and political slash legal, and demographic, and social, and competitive, and global. All these sections have arrows pointing inward to the core internal environment. — https://opentextbc.ca/businessopenstax/chapter/understanding-the-business-environment/

KPIs for Digital Marketers

Customer Life Time Value (CLV)

ARPU: the average amount of monthly revenue per customer. Increasing ARPU will increase MRR and shorten your payback period, assuming CAC remains the same.
MRR: the monthly recurring revenue that is normalized from all recurring items in a subscription. It’s the best way to visualize the cash flow coming from your customers. The more that you grow your MRR, the quicker you’ll reduce your payback period and grow your revenue.
MRR Churn: the revenue lost each month from churning customers. It needs to be continuously monitored and reduced to keep your company growing. Significant MRR churn can lengthen the average customer payback period.

By far the most important number to know is the lifetime value of a customer (Customer Lifetime Value). The CLV is the estimate of how much a customer will spend over their lifetime with your company. This number measures customer loyalty and provides the amount that should be spent on marketing efforts. It is meaningful because it is the metric that thas the highest correlation with long-term success.

Calculating CLV is pretty simple once we have the main components: revenue and churn rate. The great thing about CLV is that is the standard and is used to measure your standing among your peers. There are a lot of shifting parts that can make it complicated.

Keymetrics — https://www.profitwell.com/blog/how-to-calculate-ltv-for-saas-the-right-way

The first component is the amount of money that each customer brings in. The most common frequency used is monthly, so we can use the average amount of monthly revenue per user (ARPU). ARPU looks at the revenue earned in a time period and divides it by the number of users in that time period. Churn rate is the rate of customers who stopped using your company during the period vs the last time period.

Another way to look at lifetime value is multiply the monthly revenue with the number of months a customer. is expected to do remain your customer. In both cases, you are looking at money received from customer and how long they will remain your customer.

Even though we used monthly figures it will make sense to adjust the frequency according to industry standards. The important thing is to always keep frequency of time uniform when comparing CLV to other metrics (like CAC). For example, if we were looking at marketing campaign that runs for 3 months, then we’d have to compare with the customer acquisition costs for the same quarter and compare results with subsequent quarters.

A big thing to consider is the make-up of the customers. Candy Crush is an extremely popular game that made $1.33b in 2014, even though less than 4% of users pay for content. CLV can then be calculated using all users and with only paying users. The results may influence decisions to acquire more customers or focus on the 4% that pays, keeping in mind the effect of the network effects that scale brings.

Customer Acquisition Cost (CAC)

Just like only looking at how much you exercise is not a great way to track your weight loss. We can’t just focus on the amount of money coming in. Customer Acquisition Cost (CAC) measures the cost of converting potential leads into paying customers. It is a profitability metric that measures the total amount spent attracting customers and the number of customers gained in a given time period. In a hyper-competitive environment, CAC gauges the effectiveness of marketing campaigns.

https://clevertap.com/blog/customer-acquisition-cost/

The main component of CAC is the cost. We have to include all overhead and costs incurred to acquire a client and includes salaries, commissions, and bonuses for employees. Once the CAC is calculated, it can be paired with other metrics to show different costs per segment or lead. The length of time is important when calculating CLV:CAC ratio since they must be uniform to accurately assess.

https://www.forentrepreneurs.com/startup-killer/

The figure above shows the relationship of customer LTV to CAC. The bottom left red arrow shows costs that are rising CAC. There are many general rules to help reduce costs, such as running a lean organization/campaign, planning for unexpected costs, and ensuring all costs are accounted for. Good advice is to simultaneously improve revenue and reduce costs by using testing (A/B testing) to improve conversion metrics. The best place to start is the bottlenecks in the process: cart abandonment rate, landing page, site speed, mobile optimization, and general site performance.

CAC Payback Period

Once CAC is calculated, it helps to know how long it will take to recoup the costs of acquiring new customers. When you pay to attract a customer, you don’t get the full benefit until their revenue exceeds the CAC. CAC payback period is the calculation to find the number of months it takes to earn the money back. This is the breakeven point for your investment in growth.

CAC Payback Period = CAC / [ARPA * GROSS Margin]

The payback period shows the amount of cash needed before turning a profit. The shorter the time period is, the more profitable the company will be. Generally, good startups recover CAC in 12 months or less. Of course, it depends on many different factors that face the company.

Noom Example

In researching Noom, I found that they had an estimated payback period of just 6 Weeks. Last year they managed to raise an additional $58m and in January, they reported $237 in revenue which is almost 4x what they earned the prior year.

Even though they are growing at a rapid pace, having a payback period of 6 weeks means they are very efficient with their costs. Upon researching ways to reduce the payback period, I came across the following quote: “… A strong brand, great product, and continued development, self-service, and word of mouth (organic) traction has a lot to do with an efficient sales organization.”

Noom does. a lot. of these things well (usatoday):

Organic customer acquisition: the first ad I’ve seen for the company was this year and the comments from users were overwhelmingly positive and plentiful
Self-service model: this looks at scale and being able to grow revenue without growing costs. Their main model simply a very easy food log along with information on healthy weight. There’s a ceiling that these costs could grow.
Consistently increase expansion revenue: The first thing they do is to lock in a 6 -month subscription ($150) to use their program. It’s. a great way of cutting the payback period by 6 months. In the app there are many opportunities for a custom meal plan, workout, or ‘weight loss DNA test’ which can go up to $100.

LTV:CAC ratio

Since both LTV and CAC are key important indicators, they have a natural relationship that can be used as a guide for the company. While it makes sense to grow and reduce costs, if you are not spending enough on acquisition strategies, you may not be growing at your full potential. Having an LTV that is 3 times greater than the CAC is commonly viewed as a good equilibrium to strive for. This is known as the LTV:CAC ratio.

An LTV:CAC ratio of 1:1 means that you are just breaking even on each customer, while a ratio of less than 1 means you are losing money with each customer. While the early stages of a startup might show less than a 3:1 ratio, it’s important for this ratio to show an upward trend. A downward trend might be a cause for alarm if the trend continues because it shows customer dissatisfaction.

KPIs and Success

“What gets measured, gets managed” is probably the best quote to explain KPIs. They are the most important figures to watch over and ensure company success. Each company is unique and may need different metrics to focus on. It goes back to knowing your value, your competitors, and the environment to find metrics that matter to you. We didn’t go over the number of KPIs to use and what KPIs to ignore. Having too many goals is the antonym of focus and the general advice is to look at just a handful of KPIs for each part of your organization. Vanity metrics are metrics thatcan be measured but doesn’t need to be a focus. Examples of these are metrics that can be easily manipulated: registered users, raw page views, and comments on social media. They might look great on a presentation but at worst can lead to distraction from the KPIs that truly matter.