Key Performance Indicators (KPIs) are indicators used to judge the performance of any venture. Most ventures track them to stay in line with business objectives and take corrective action whenever there is a difference in expectations. This session covered the most commonly tracked KPIs, which are:
1. Booking v/s Revenue: Booking vs revenue for instance which is applicable in the case of subscription-life models, let’s take an example – where you are a gym, and have sold an annual gym membership for 12000 rupees on the first day of January. At the financial year close of March 31st, your ‘Bookings’ would be 12000, since that is more of an internal tracking, basis which you will judge sales team performance. Whereas, your actual ‘Revenue’ would be 3000, proportionate to the time period passed, which would be how it would actually reflect in your accounts. While tracking “Revenue” gives you the actual health of the company as on date, tracking ‘Bookings’ helps you understand the potential future earnings.
2. GMV v/s Revenue: Now, let us assume you are online marketplace, in which case your KPI would be GMV vs revenue. So, let us assume, on your online marketplace, you have sold ABC brand’s shoe online. Its MRP is Rs 2000, of which your commission from the seller is 10% on MRP, which is Rs. 200. In this case, GMV is 2000 and your Revenue is 200. Tracking GMV helps companies, understand their share in the market they operate in, while tracking ‘Revenue’, of course helps understand and track the performance of the company. GMV is gross merchandize value. Gross merchandize value is a notional concept when it comes to a marketplace like Shopclues. The term actually typically comes from a more inventory led model, where people are buying and selling. Companies like I would say Amazon would probably use GMV not to report the business, GMV first is a comparative term that allows you to compare a market place with an inventory based model. It is basically sum total of the gross value of the merchandize that are sold on the platform though the business makes its revenue from a certain percentage of the GMV that we take as our service fee. So, revenues for companies like Shopclues or ebay or Tow Bow would be the take rate that is a percentage of the GMV that is sold. So revenue would be the take rate, GMV is the sum total of the gross merchandize value.
3. Revenue Run Rate: Revenue run rate versus total revenue. What is revenue run rate? This is most widely used by digital businesses, where you measure the revenue of the last month and multiply that by 12 to understand the “revenue run rate”. So if you had one lakh rupees as revenue for the last month, your Revenue run rate would be 12 lakhs. Chances, of course, are that at the yearend, you might actually be well-above or well-below, depending on how you perform. Tracking Revenue Run rate helps companies progressively keep track of their revenue performance and take corrective measures in-time, rather than at the end of the evaluation time period.
4. Gross Profit: Gross profit and gross profit percentage. Gross profit is the profit you’ve earned after deducting all your direct costs from the revenue you have earned. Keeping track of this gives a good sense to an entrepreneur of the health of his business. If your gross profit, as a percentage of the revenue, is healthy, then it is a clear indication that you should be spending more time to increase sales, so that gross profit grows, leading to the profitability of the business in general. But if you find that your gross profit percentage is low or negative, then you have a tough task ahead as you either need to reduce costs to increase your profitability chances or you might have to increase your prices to take up revenues. It’s important to study trends related to gross profits, as volumes might be impacting the same tremendously, in which case you should then actively work to get on board new and more price competitive vendors to be able to achieve better margins. Tracking Gross profit also helps compare between product lines, and decide resource allocation for scaling up.
5. Life Time Value: Especially for new age e-commerce venture, is LTV or Lifetime Value. So long as your product or service is good, a purchasing customer would be purchasing with you at least a few more times. For example, if a customer spends 1000 rupees with you on one transaction, in which your company earns 300 rupees, and the customer is likely to come back for 3 more such purchases, then the lifetime value of this customer is 900 rupees.
6. Customer Acquisition Cost: The Customer Acquisition Cost or the CAC, CAC is the amount you spend to earn the 900 rupees we just saw was the Lifetime earnings from our customer. Let us assume that this cost totals to about 400 rupees per customer, in which case you have a profit of 500 on the customer. Needless to add, your LTV should be greater than your CAC, and if it isn’t, then either you reduce your CAC or take up your LTV. If we are going to be looking at new customers that we are acquiring on a month on month basis, what is the cost of acquiring those customers? What we did was we took all our marketing cost and divided it by the new customers that we acquired in a particular month and that is how we arrived at the cost of customer acquisition. Ironically or this is not entirely the right approach of arriving at a cost of customer acquisition because you would have and every company spends money on retention also, you would have marketed to customers who have bought from Zivame on the same channels such as Facebook, on the same channels of SEM, I mean search, display etc. I would search Zivame and click on a paid link and come, I would have bought from that. So while technically this is not correct, but on a periodic level if you can look at from a trend analysis and say “hey, this is how my cost of customer acquisition is trending”, you know which way you are going, that’s number 1.
7. Monthly Burn: Monthly burn again is very important for an entrepreneur to understand. When you are in your initial stage you are bootstrapping, every month you have limited cash flow available and you count on each of them. Most of the entrepreneurs know this number and it’s important to track that when you compare this with what you had budgeted for. This will give you an understanding of when you’ll be running out of your money. Like for instance you started with the funding of 1Cr and your assumption of monthly burn was 5 lakhs with then means you would be spending your money in 20 months. However, over the performance you had over the last six months you realize that you already spent 60 lakhs.
8. Average Revenue Per User: Average revenue per user is effectively your total revenue divided by the total number of customers. You had all that period whereas the LTV was for your lifetime revenue per user of that particular user so both are very different. Average revenue per user gives you a fair indication of what kind of the revenue you are earning from a customer and what is the mix of your customer base. Let’s look at this example, in a service business if you have an IT firm and you have a revenue of 1 crore you have only 5 customers that means your average revenue per user is 20 lakhs that means, you are having customers with large ticket size. Average revenue per user is also metric and very different from what we looked at as LTV earlier. From each of the customer on a single transaction. Whereas, the LTV is the net earnings from one single customer over the lifetime of that customer so both are different, average revenue per user gives you a good understanding of how you want to grow your business and how many customers you need to acquire for that for example, continuing with our restaurant example earlier if you had a typical restaurant business you would have dine-in sales and delivery sales.
9. Conversion Rate: Over the period conversion rate is a very important aspect through which the growth of your business is measured. From an investor’s point of view business metrics suggest conversion rate would give them an understanding of the health of your business, how much money you need to invest more on a regular basis to attract growth for conversion rates. That means you are actually spending much more efficiently on your marketing initiatives and you can take risks if your conversion rates are low and you have a very low margin of error so that means you need to be very careful of where you spend.
10. Cohort Analysis: Cohort analysis on the other hand measures the repeat behaviour of your customers. For example, if you acquire 1000 customers in a particular month; how many people churn over the period is measured by this cohort analysis, let’s take this one symbol of 1000 and see in each of the month how many people of this 1000 are coming and buying again. For example, in a month there are only 600 people who are coming in and buying again and in the month 3 there are let’s say only 360that means only sixty percent of your people are coming and repeating in each month. Higher the percentage or higher the repeat for any business is fine because it indicates that you need to spend much lesser and you would grow organically in the future much more with what you’ve already invested.
These are very important metrics that an entrepreneur should track in order to ensure the success of his venture. I am sure there are more such key performance indicators that are essential for an entrepreneur to track. So let us listen to our subject matter experts talk about some of these KPIs.