The Hierarchy of Key Performance Indicators
This article is intended to be the beginning of an ongoing series that unpacks KPIs that matter for early-stage startups.
The tracking and goal setting of key performance indicators (KPIs) is an absolutely critical part of a business’s strategy and growth plan. There are many KPIs out there that are important for businesses to track, ARR for SaaS startups, GMV for marketplace startups, gross margin, churn, net dollar retention, etc. and typically, one metric doesn’t tell the full story of a business’s performance.
I recently read a Twitter post from Joe Du Bay, CEO and cofounder of Eden Workplace, titled The 10 Metrics for SaaS Startups and I found it to be extremely insightful.
The metrics he mentions typically seen in SaaS startups:
- Annual Recurring Revenue (ARR)
- ARR Growth
- Average Customer Value (ACV; this can also be referred to a Average Revenue Per Unit or ARPU)
- ACV growth (or ARPU growth)
- NDR — Net dollar retention
- Gross Revenue churn rate
- Gross Margin
- CAC Payback on a gross profit basis
- Months of cash runway
- Pipeline
These 10 metrics outlined by Joe show a comprehensive view of an early-stage SaaS startup and help founders and their investors determine the operational health and future growth trajectory of the business.
But, if you’re a founder or CEO, how do you engage your management team on these KPIs? A founder or CEO should not task herself or himself with driving performance for all of these metrics, but rather, have a hierarchy in place to establish ownership and responsibility of each metric within the management team.
A business’s KPIs should fall into three categories:
- Entity metrics
- Business unit metrics
- Activity level metrics
Entity metrics are typically owned by the CEO. These are metrics that are most visible to the business’ Board of Directors and are commonly communicated in fundraising conversations with new and current investors. Metrics that fall into this category are generally descriptive in nature and tell stakeholders what has already happened. A few examples of metrics in this category are:
- ARR
- ARR Growth
- Gross Margin
- Gross revenue churn rate
- Months of cash runway
Business unit metrics typically support the entity metrics of the business and are owned by members of the CEO’s management team who are in charge of the various departments of the business (e.g., Sales, Marketing, IT, Product, etc.). These metrics are also generally more predictive in nature and can be signals of future acceleration or deceleration of the business’s performance (e.g., if a business’s NDR is down, it may be an early signal of a business’s ARR growth slowing). Metrics in this category are:
- Average Customer Value (ACV; this can also be referred to a Average Revenue Per Unit or ARPU)
- ACV growth (or ARPU growth)
- NDR — Net dollar retention
- CAC Payback on a gross profit basis
- Pipeline
Lastly, activity level metrics support the business unit metrics and should be owned by specific teams within each department (e.g., inbound marketing team, etc.). These metrics tend to be more prescriptive in nature and can help members of the management team answer questions such as “what activities should be done to produce a desired outcome?” There are many KPIs that can be categorized as activity level metrics, one example would be:
- Cost Per Acquisition (CPA) metrics
Inbound marketing and CPA metrics deserve an entire post of their own, but in general, as a business grows, it needs to keep its pipeline filled with qualified leads, customers converting from free trials to paid, etc. This is likely to involve an increase in spend and the trying of new channels to reach prospective customers. These actions may increase a business’s CPA metrics and also their CAC Payback metric if not managed appropriately.
This hierarchy only summarizes one of the many ways to assess and track the performance of a business. If you have other KPIs or methods that you have used in your experience, please feel free to comment and share below.
