customers customer startups rate new kpis

techsuch May 9, 2021 0 Comments

Know Your Numbers: KPIs for EdTech Startups# Know Your Numbers: KPIs for EdTech StartupsWhile the country-wide lockdown spelled trouble for most Indian startups,there was one sector that benefited significantly from the shutting down ofeducational institutions – EdTech. The momentum was so great that it became2020’s most funded sector within no time, with VC investments tripling invalue between January to July 2020 compared to the previous year, from $310Million to $998 Million.Apart from the big guys who’ve stepped up their game further, many new EdTechstartups have been born in the Covid era to match the enormous demand.Segments such as tutoring and test preparation, which attracted fewerinvestments in the past, have caught the attention of the masses and, in turn,investors.Given this rapid growth, more and more entrepreneurs are looking to make aplace for themselves in this industry. The best way to judge how well astartup is doing is by evaluating the industry-specific KPIs or KeyPerformance Indicators.Key Performance Indicators are those fundamental quantifiable values that helpascertain a company’s performance over a period. Tracking KPIs is beneficialfor both entrepreneurs and potential investors. Here are the important metricsto track for EdTech startups.Monthly Run Rate (MRR)The first indication of a company’s sound financial health is consistentrevenue growth. Needless to say, the amount of money you are making is acritical number to track to get a sense of how well your product is beingreceived in the market and if you are on the desired growth trajectory.The monthly run rate, or MRR, is simply the revenue you generate in the courseof a month. MRR is the easiest unit to break down your revenue into forstrategizing purposes. You can also choose to keep track of your annual runrate (ARR), which can be derived from the MRR itself.To calculate MRR, you need to know your Average Revenue Per User (ARPU) aswell as the size of your current customer base. The formula is as follows:MRR = ARPU (per month) x Number of CustomersTo find the ARR, you can multiply the MRR by 12.Monthly and Daily Active UsersThe greatest validation for a startup comes from its customers. When you seethem actively engaging with your product or service, it is clear that you havecreated something that fits their needs. A couple of good metrics thatquantify this aspect are monthly active users (MAU) and daily active users(DAU).An active user’s definition is not consistent, and startups tend to set theirpreferred benchmark for the same. However, it is generally said that an activeuser should be one that completes a pre-specified task on the platform, suchas watch a video or click on an article. Counting only the number of loginsmay not be the best indicator of activity.The relevant metric that can be derived from MAU and DAU is the stickinessratio, which measures the number of customers that continue using the platformafter the first time.Stickiness Ratio = DAU / MAUIf the stickiness ratio comes out to be 0.5 or 50%, it means that in a 30-daymonth, customers used the app for 50% of the days, i.e., 15 days.Customer Acquisition Cost (CAC)In order to get a new customer, companies have to invest in advertising andmarketing costs. This is all the more relevant in the case of early-stagestartups when the market is yet to warm up to a new product or service.The customer acquisition cost (CAC) measures the average amount of cash astartup burns in order to onboard a new customer. CAC’s optimum level variesdepending on the market conditions, competitive landscape, and type ofindustry.It can be calculated in the given manner:CAC = Total Spend on Marketing and Sales / Number of New Customers AcquiredThe CAC forms a part of the basic unit economics for a startup, which, ifhandled properly, make way for scalability and profitability.Lifetime Value (LTV)The other major component of unit economics is the lifetime value or LTV. Thegoal of every startup is to extract the maximum possible revenue out of itscustomers over time. The logic is straightforward- the longer the customersstay with a brand, the more valuable they will be for the company.LTV measures the average revenue a customer brings in during the course oftheir relationship with the brand. The lifetime value is affected by multiplevariables, including gross margins, product lifetime, and customer stickiness.The formula for LTV is:LTV = Average Customer Sale Value x Average Customer LifespanThe best use of CAC and LTV is to use them together as a ratio. Typically, itis said that the LTV of a customer should be at least 3 times the cost it tookto acquire him or her. This means that startups should target a CAC:LTV ratiothat is greater than 1:3. Although it is no magic number for success, it isindicative of stability and profitability.Customer Churn RateWhile most startups aim to build a loyal group of users, the truth is that itis quite hard to retain customers. The churn rate or rate of attritionmeasures the percentage of customers that a startup loses in a given periodowing to different factors.The startup is free to determine the period over which it seeks to determineits churn rate. Generally, churn is seen quarterly, semi-annually, orannually. The formula for the same is:Customer Churn Rate = (Customers Lost in a Period / Total Customers at theStart of the Period) x 100It is critical to monitor the churn rate and develop strategies to encouragecustomers to do business with the company for a longer time. As mentionedabove, early-stage startups have to shell out a lot of money to acquire newcustomers. Plans must be in place to ensure that customers are retained asmuch as possible.BottomlineWith the competition rising in the EdTech space and investors pitching in moremoney, KPIs like the above will be crucial in determining the deal flow. It isfamously said that what cannot be measured cannot be improved upon, and it isquite true in the case of startups.Tracking KPIs allows for internal evaluation and gives a bird’s eye view ofthe performance to potential investors.

Leave a Reply

Your email address will not be published.