A KPI, or Key Performance Indicator, is a measurable data value that can demonstrate how effectively you are achieving your key business objectives. By identifying particular data points you can measure performance at a low level, for targeted areas or processes, or at a higher level for overall company performance. You can then determine your progress towards achieving your strategic and operational business goals, as well as comparing your own performance to other business enterprises within your industry.
Analysis of KPIs allows you then to address specific performance issues, including:
- what is pushing customers to buy
- what is working well
- what needs to be improved
- whether the business is financially viable
- how you can improve overall profitability
When you have physical products and outlets, it's easier to compare sales volumes and profit margins, but for cloud-based businesses such as SaaS, getting a handle on these metrics can be more complicated. Some useful KPIs include:
Customer Acquisition Cost (CAC)
This figure is critical to most business models and equates to the total amount you have to spend in setup, marketing and advertising etc., per customer acquired. In an ideal world, CAC would be zero, since word of mouth and customer feedback cost nothing and would help to grow your business for free. That still doesn't account for your startup costs, however, including development and launch of internet platforms, hiring employees and fundraising; and you will have to do some marketing at least to get that first customer. The aim is to use CAC as a KPI tracker, and work on decreasing the figure over time.
Customer Lifetime Value (LTV or CLV)
This figure represents the total revenue you can expect from each customer over the duration of the business relationship, or lifetime. With such a high turnover in SaaS products, ecommerce platforms and marketplace services, calculating LTV depends on several variables, such as:
- average order value per customer (AOV)
- how many repeat orders they make
- how long the customer continues to use the platform
- differential between buyers and sellers
- commission percentage rates
It may be that it's a one-off purchase, or it may be that customers use the same software product for several months or years, if it's not superseded by better apps. Marketplaces are particularly successful in connecting service providers to consumers, but rely on an adequate commission and expanding markets to increase their market share.
Average Order Value (AOV)
AOV is an essential element in determining your LTV, or how much revenue you'll get over the lifetime of the business relationship. The AOV represents the average value of an order and is naturally better the bigger the average is.
Monthly Active Users (MAU)
This figure shows how many unique users visit your website, platform or service each month and carry out some activity other than just logging in. Such activities include:
- content sharing
- storing information
- making purchases
- responding to offers/discounts
For peer to peer marketplaces, monitoring the MAU is an indicator of whether they are attracting new users if it shows an increase, or losing consumers if it goes down.
Monthly Revenue Rate (MRR)
MRR is a figure representing the predictable revenue stream per month of your platform. This means first identifying MAU, or the total number of active monthly customers per month, and finding out how much revenue each of them generates.
Contribution Margin (CM)
This metric shows the margin left over after deduction of all variable costs related to production of the service from total revenue. This figure is separate from fixed costs, such as development costs, which remain permanently in the business, regardless of the quantity of items produced. The variable costs (e.g. marketing spend) can change according to circumstances. CM indicators help you determine how to price your products, which services to continue building, and sometimes which ones to abandon.
Provider to Consumer Ratio (aka Seller to Buyer)
This figure helps you to track the growth of a peer to peer marketplace, and is defined as the number of unique customers a single marketplace provider can serve. This obviously varies according to the scale of your business and its global reach, so that giant service providers like AirBnB were showing ratios of 70:1 in 2015, while Uber were showing 50:1, and eBay a surprisingly low 5:1.
A conversion rate describes the percentage of visitors to your platform or website who actually completed a desired goal (i.e. they converted their expectation into a real outcome, like a purchase or booking), as opposed to the total number of people who visited it. If you have a good website or app and have marketed it successfully, you should achieve a high conversion rate.
Net Promoter Score (NPS)
This metric can show you whether your customers are likely to help you grow your business for free, by word of mouth and feedback to other users, and usually takes the form of a scaled questionnaire on the site. Most commonly, this takes the form of clicking a button that asks users: How likely is it that you'd recommend us to a friend/colleague?
Users are then given a scale of possible answers from 0-10. According to metrics provider Satmetrix, this scale then divides responders into three groups:
- Detractors (score 0-6)
- Passives (score 7 or 8)
- Promoters (score 9 or 10)
The Net Promoter Score consists of a simple % subtraction: Promoters – Detractors. If 60% of respondents are Promoters and 30% are Detractors, your NPS = 30, but if only 10% are Detractors then your NPS = 50%. Obviously, the higher your NPS, the more your platform will grow by itself.
This is a new descriptor for measuring customer turnover, and relates to how many users you lose on a platform or marketplace over a specified period. Churn rates are crucial for gauging the strength of SaaS businesses, which are based on recurring subscriptions. If the platform is showing a high churn rate, this indicates that customer satisfaction is correspondingly low, and you need to think about why this is.