Why it’s important to figure out what you need to know to grow
Growth – sustained growth – doesn’t happen by accident.
Sure, you have to work hard; but there’s more to it than that. You have to work hard on the right things.
And that’s a challenge. Because it’s not necessarily clear right from the start just what the ‘right things’ – your key performance indicators – are.
And that means you have to work to identify them.
A recent “Aha!” moment on this issue came as I was reading The Secret Race: Inside the Hidden World of the Tour de France by Tyler Hamilton and Daniel Coyle. It’s a book that looks at what cyclists have done to try to win the Tour de France.
Among the many things cyclists and their trainers did was to measure various factors to see whether any of them made a difference to the outcome.
In other words, they were looking for cycling’s key performance indicator (KPI) – the one or more things they could work on that would make the difference between winning and losing a race. I suspect this data-centric approach is used in most pro sports.
There are all sorts of possibilities. (Many unfortunately went far beyond the wholesome question of what the cyclist ate for breakfast.)
In the end, they discovered that the one measure that really counted was “watts per kilogram”, the power cyclists are able to generate in relation to their weight. That was their key performance indicator, the crucially important measurement that would make a difference in the outcome of a race.
So what are our KPIs?
Your key performance indicators start with your goals.
The cyclists’ goals were clear: Win the Tour de France.
Our goals are to dramatically grow our customer base and capture more share of our target market. It’s an acquisition-first strategy that impacts the features we build, the customers we target, and, of course, what we measure.
Once we had our goals in sight, and once our management team and board of directors were all on the same page, I set out to learn as much as possible about what we would have to measure.
Here are some of the tools I found helpful, and I would recommend them to any entrepreneur:
- Good to Great, by Jim Collins
Collins talks about the intersection of “The Three Circles”: What you are very, very good at; what you are passionate about; and what drives your economic engine. Where those three circles intersect, he says, is where you want to be. In other words, know your strengths, know what gets you excited, and know what people will pay for. You want to be operating in the area where those things all happen together.
- Bessemer’s top 10 laws of cloud computing and SaaS metrics (https://bvp.app.box.com/10lawsofcloudcomputing)
SaaS means “software as a service”; this is particularly relevant to Klipfolio, but I think the principles could apply to many businesses.
- Feld Thoughts, a blog by Brad Feld, a managing director at Foundry Group in Boulder, Colorado. (http://www.feld.com/)
- David Skok’s blog for entrepreneurs and startups. (http://www.forentrepreneurs.com/)
With information from these sources, I was able to work out what is most important to Klipfolio – the things we need to measure.
For our business, the two most important things are: account acquisition and monthly recurring revenue.
To understand those, we start by measuring the following:
- The number of new customers we acquire compared to the number of prospects trying our software (the lead-to-win conversion rate);
- The total number of customers or users we retain on a monthly basis (the retention rate); and
- How many new users we gained from our existing customer base (the expansion rate).
Supporting these, we then also measure the lifetime value of a customer compared to the cost of acquiring a customer (the LTV:CAC ratio) and the number of users who use our software on a daily basis or weekly basis (the active user count or percentage). We also look at a series of department-specific performance KPIs.
Over the coming weeks, I’ll dive into these metrics in greater detail,discuss their value and show how to calculate and interpret them.
Over time, as we collect more data on these KPIs, we will be able to better analyze them and see emerging trends.
Right now, they are figures to watch – figures that tell us a lot about our future.
Allan Wille is a co-founder of Klipfolio, and its president and CEO. He’s also a designer, a cyclist, a father and a resolute optimist.
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