June 20, 2019

'If You Can't Measure It, You Can't Manage It'

The concept of "if you can't measure it, you can't manage it" is more prevalent today than when I launched my first business many years ago. Startup entrepreneurs and corporate executives alike have access to a variety of methods to evaluating the success of an organization or a particular activity in which it engages through key performance indicators (KPIs).

An article published by Early Growth Financial Services, a California-based accounting services firm, accurately notes how KPIs are important indicators that "show the health status of your startup. Like how tracking what you eat, how you sleep and your blood pressure increases your likelihood of having a strong well maintained life, KPIs help illustrate how a business is connecting with the needs that keep it strongly humming along."

Furthermore, KPIs "are all the trackable elements that let you see where to find your greatest areas of opportunity, as well as where focus may have drifted and is needed. It can be easy to overlook tracking KPIs, or even setting up a track list to begin with, since they are repetitive measurements. Despite that, they remain essential to the smart manager or leader because it is in the routine that the base is secured for achieving the grand goals ahead."

The article suggests that KPIs can be classified into two different categories: leading and lagging. "With leading indicators, you are setting the marks to aim for; these are the future goals. Since they are oriented on what is to come, they are more challenging to measure accurately, yet easier to influence. An example might be the number of new prospects scheduled for engagement in the following week.

"By setting a target number you can track how well your sales team is engaging and getting in front of faces. The higher the number of meets the more potential for conversion into clients and revenue."

What is more, "Often sales can achieve a big close one week and lose focus the next on maintaining the drive to prospect. This won't show up immediately if you just look at revenue, but that's the beauty of having a lead indicator. Similarly, you can further break this down to more granular KPIs such as:
  • Number of cold calls daily setting up engagements;
  • Number of follow-ups with previous clients for further services; and
  • Revenue goals per salesperson.

"Leading KPIs are input oriented. They represent numbers to aim for. They are useful for setting culture and expectations with employees."

Conversely, "Lagging indicators are output oriented. They are easier to measure since they are based on what has already taken place. Often these are more internal, such as a KPI of burn rate or new employee growth per quarter. While you can measure many dimensions of accomplishments and benchmarks through all departments a solid core range of financial KPIs is especially useful for startups."

Lagging KPIs allow a company "to take stock of how things have been running. This aids firms when seeking investors. Many times, they will be used in tracking the financial health of the operation. Lagging indicators can make up a monthly or quarterly report card on how well your strategy and efforts are being achieved. Investors like firms to back up promises of potential with charted previous outcomes."

I concur that "[l]agging and leading KPIs work best when you bridge them together into a matrix for the firm. While one states your vision as realized accomplishments, the other breaks down the activities that create those accomplishments. If you see a steady rise in one without a rise in the assumed corollary, then you know it is worth reevaluating your strategic hypothesis."

Moreover, the article is correct "that KPIs are great at the company level, department level, and employee level; setting them up and running them is one of the surest ways to create repeatable solid success."


While created for startups, this infographic provides a comprehensive list of metrics that will help businesses of all sizes measure and manage performance:
  1. Monthly Recurring Revenue (MRR): monthly total of paid customer fees
  2. Annual Recurring Revenue (ARR): recurring revenue on an annual basis
  3. Average Revenue per Account (ARPA): MRR/Total # of Customers
  4. Gross Profit: total revenue minus the cost of goods sold
  5. Total Contract Value (TCV): value of one-time and recurring charges
  6. Annual Contract Value (ACV): value of a contract over a year
  7. Lifetime Value (LTV): prediction of the net profit from the entire future relationship with a customer
  8. Deferred Revenue: amount that was received by a company in advance of earning it
  9. Billings: current quarter revenue + deferred revenue from previous quarter
  10. Customer Acquisition Cost (CAC); full cost of acquiring one user
  11. Customer Concentration Risk: revenue from largest customer/total revenue
  12. Daily Active Users (DAU): users other than one-time users per day
  13. Monthly Active Users (MAU): users other than one-time users per month
  14. Number of logins
  15. Activation Rate: number of users taking a specific action to get value out of a product
  16. Month-on-Month Growth: average of monthly growth rates
  17. Compounded Monthly Growth Rate ((latest month/first month)*(1/# of months)-1
  18. Monthly Churn Rate: lost customers this month/prior month total
  19. Retention by Cohort: % of original installed base (1st month) that are still transacting
  20. Gross Churn Rate: MRR lost in a given month/MRR at the beginning of the month
  21. Net Churn: (MRR lost - MRR from upsells) this month/MRR at the beginning of the month
  22. Monthly Cash Burn Rate
  23. Net Burn Rate (revenues - gross burn)
  24. Gross Burn (monthly expenses + any other cash outlays)
  25. Total Addressable Market (TAM) (revenue opportunity available for a product)
  26. Annual Run Rate (projection of current MRR into the future, annualized)
  27. Gross Margin (difference between revenue and cost of goods sold)
  28. Sell-Through Rate (number of units sold in a period/number of items at the beginning of the period)
  29. Network Effects (effect of one user on the value of that product to other people (ex. Metcalfe's Law))
  30. Virality (viral coefficient - avg. number of invitations sent existing user * conversion rate of existing user)
  31. Net Promoter Score (how likely user is to recommend your product to a friend or customer)
  32. Platform Risk (dependence on a specific platform or channel)
  33. Direct Traffic (traffic that comes directly and not through an intermediary)
  34. Organic Traffic (unpaid traffic from search results)
Which KPIs do you find most valuable to your business? Do you use any KPIs not listed above?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

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